Banks are preparing for competitive forces in lending


Although traditional financial institutions have faced mounting market pressures to digitize with the advent of new FinTech competitors, there are still many areas where banks have the upper hand, including commercial lending.

Aside from the fact that many institutions are decades or even centuries old, with longstanding customer relationships and brand awareness, traditional financial institutions also have vital data about their business customers that is vital to their underwriting and decision-making.

According to Elena Ionenko, co-founder and chief operating officer of credit software-as-a-service provider TurnKey Lender, this is an area where banks have an edge over their FinTech competitors.

“Even today, FinTechs and non-bank lenders who offer various business loans online are still processing applications and making decisions manually in many cases,” she said in a recent interview with PYMNTS. “To digitize the commercial loan lending process, you need to create specific credit scoring models that can only be built if you have data.”

With corporate customers large and small now demanding speed and efficiency throughout the credit lifecycle – from applying online to making a decision, to actually receiving funds and paying back the loan – traditional financial institutions (FIs) have the power to turn to digital commercial lending Automate and accelerate workflows is enormous thanks to this valuable data.

However, as Ionenko explained, recent developments in the lending landscape have put renewed pressure on banks to improve their game.

A PPP disaster

Last year’s Paycheck Protection Program (PPP) initiative provided a much-needed financial lifeline for small and medium-sized enterprises (SMEs). But an overwhelming surge in demand has painfully exposed traditional banks’ major shortcomings in corporate lending.

Confusion about what forms were required for banks to receive an application, the processing of hiccups, misinformation, and allegations that financial institutions favored existing customers over new SME applicants, cast doubt on the ability of traditional FIs to be agile, digital -first lenders operate in today’s economy.

FinTechs, on the other hand, who are built on a digital-first foundation, found their feet in the middle of the flood of PPPs.

“In many cases, this program has been run very efficiently by FinTechs and online lenders who already had everything to analyze the application forms and make decisions much faster than banks,” said Ionenko.

Due to the framework of the PPP initiative, there were relatively loose requirements that small businesses had to meet to qualify for funding, so FinTechs that lacked data on business customers could still easily write and process PPP loans.

However, amid yet another round of state aid to small businesses, traditional financial institutions are better positioned to meet demand. Lenders may not expect the dramatic funding race the market saw in 2020, while legacy banks also had the opportunity to upgrade back office infrastructure and fix the vulnerabilities exposed by the mishaps in the first round of PPP funding .

The environment gave banks an even greater opportunity to add value by reaching out to third-party technology and software-as-a-service providers who, Ionenko explained, can help FIs digitize and automate without them force to give up control of risk exposure and credit policy.

Embedded finance shifts competition

Traditional financial institutions continue to take a page from FinTech’s book to prioritize automation and digitization in their lending business, but the PPP initiative has proven that banks still have a long way to go.

FIs are increasingly leveraging FinTech partnerships, integrations, and acquisitions to accelerate their credit modernization efforts. As this push intensifies, there are more changes in commercial lending that could further challenge banks’ competitive position.

One of the most prominent, according to Ionenko, is the rise of embedded finance, particularly in the B2B economy, where manufacturers are integrating their own financing services for their business customers to create a seamless, holistic experience for buyers.

“They bring this technology in-house to offer their customers better financing terms, make it easier for them to collect payments, and simply build a better relationship with customers,” she said. “You don’t want to send customers elsewhere for financing.”

As this market trend prevails, banks will continue to look for ways to develop more attractive commercial lending experiences. The landscape is vast, and if financial institutions implement the lessons of the missteps in PPP finance, they will be in a good position to expand their digitization efforts to other areas of commercial finance as demand increases.

From trade finance to invoice finance to working capital loans, many companies will look for additional finance when government aid is not enough, Ionenko noted. These are the best areas for banks to dig deeper into when they have mastered PPP automation.

“By taking this first step, you will gain confidence and understand how the technology works,” she said. “You will see how it can be integrated into your existing infrastructure. It is a good first step towards broader digitization of your commercial lending business.”



Above: Eighty percent of consumers are interested in non-traditional checkout options like self-service, but only 35 percent have been able to use them for their recent purchases. Today’s Self-Service Shopping Journey, a collaboration between PYMNTS and Toshiba, analyzed over 2,500 responses to learn how merchants can address availability and perception issues to meet demand for self-service kiosks.


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