I read with great interest TowerGroup’s recent report that the global financial services industry will spend an amazing $362 billion worldwide during 2005. I would like to send a message to every large outsourcer, software shop and 20-year-old, pony-tailed java coder still living in his parents’ attic:
Let’s spend more of this money on better commercial loan automation!
The banking industry still makes a ton of money from commercial lending – about $20+ billion per year would be my quick calculation. With this huge profit contribution, it’s ironic how sparse the technology choices and innovation are in the commercial lending arena. The problem seems to rest somewhat in how commercial lending systems have evolved.
Twenty-five years ago, commercial lending was a slow-moving art form, where credit officers conferred for hours among the paneled walls of the board room. As opposed to speed and efficiency, the focus was almost entirely on credit quality.
The analysis phase
In the early ’80s, new PC-based technologies allowed banks to become more sophisticated with credit analysis. Products like Baker Hill and WinFAST emerged to conduct cash flow analysis. The focus here was on making analytics easier and more flexible.
The compliance phase
In the late ’80s, banks began to use PC-technology to make the compliance aspects of commercial lending more effective. Faced with myriad regulatory requirements for loan documents, products like Harland LaserPro (originally CFI) and Bankers Systems began to grow in popularity. Loan secretaries around the world had a better tool than the old Smith Corona.
The back office phase
In the ’90s, as banks merged and the industry grew, the challenges of servicing and administering more creative and sophisticated commercial loans became important. Credit administration requirements came into greater focus. An industry leader named AFS emerged for commercial loan accounting, and Baker Hill gained great popularity with the introduction of its REACT exception tracking system.
The sales phase
In the late ’90s, the sales culture buzz moved over from retail to torment the commercial bankers. Now the focus became disciplined calling, consultative selling and relationship pricing. Baker Hill’s OnePoint became a fast-growing product, while core players like AFS and CRM players began to promote more front-end tools for the commercial sales force.
The NEXT phase for commercial technology
Despite all these phases of evolution, commercial loan technology still suffers from a heavy dose of fragmentation. In our consulting work with banks, we typically find clients with:
- A stand-alone CRM system or database used for sales calling;
- A series of Word docs and Excel sheets for credit approval;
- A stand-alone system (primarily isolated in Credit) for cash flow analysis;
- A stand-alone system for loan doc prep, sometimes clumsily interfaced to the core system;
- A server-based or host-based system for loan exceptions (documents, recordings) with potentially a separate system for loan covenant and financial statement tracking;
- A whole bunch of excel spreadsheets for portfolio reporting;
- And finally… a series of forms and transmittal sheets used to move files between the commercial lenders and their faithful “ Loan Operations Center” in the back office.
If there is any god of banking, this deity will surely write it in the stars that the next phase of commercial technology will be about integrated work flow. While the mortgage loan industry moves steadily ahead in automating and integrating more technical standards and work flow technology, the commercial side of the bank still waits. The vendors who help solve this significant issue for bankers now have the potential to drive the biggest Hummers in town – wealth city if you get my drift!
Requirements for the Next Gen Commercial System
So here’s a word to the vendors already writing me hate mail because their products “already have what I’m describing.” To the folks at AFS, Baker Hill, Harland, and William James & Associates – I love you guys! You have all contributed greatly to our industry, but none of you has delivered the majority of the features that banks are dreaming about today. To get an industry-wide development session going, let me offer bankers and the vendor community some high level specs for the next generation of commercial lending systems:
#1: Origination rolls into relationship management – With sales cultures, business credit scoring and centralized loan support functions, commercial lending is beginning to resemble consumer and mortgage origination processes. Today, bankers would like commercial lending systems to grab initial data and move it along through a standard work flow. There is one caveat however: commercial loans get renewed constantly. So, once a commercial loan is originated, data should be maintained and navigation available for a lightening-fast renewal and update of the borrower analysis.
#2: Sales and pipeline is oh so simple – Banks have struggled over the past few years trying to integrate sales culture and CRM into the commercial world. For the most part, efforts have failed because they have been over-engineered. Who can blame a loan officer for not wanting to spend hours each day typing data into lengthy call records. The next generation loan systems will have simple calling screens that allow officers to input only basic borrower and deal information until the transaction becomes more real. In addition, these new systems will provide a simple mechanism for cross-sell. As opposed to a gargantuan CRM system, a commercial system could have a simple screen to identify relationship cross-sell potential information and track the referral/tasking of this opportunity to another area of the bank.
#3: A tiered approach to scoring and analysis – Banks are beginning to more aggressively leverage credit scoring for small business loans. However, one problem remains: small business underwriting and heavier commercial analysis tools tend to be on different systems. Bankers would rather have one system that lets the officer “scale up” the analysis based upon the type of deal. The next generation system will have basic scoring as well as different analysis modules that can be applied to different borrower and deal types.
#4: Stages and work cues defined by the bank – The most critical enhancement for commercial lending automation will be increased work flow capabilities. Bankers want a tool set that lets them define each “stage” in the commercial lending process, with the ability to assign specific employees to stages and to view where each deal is in the work flow at all times. This is common on consumer and mortgage systems today, but just entering the commercial arena.
#5: Credit approval is burned into data flow – One of the most important features of a new commercial system will be the ability to better automate the loan approval process. The work flow capabilities mentioned before should allow for credit authorities and requirements to be defined by the bank. Built-in e-signature capabilities with audit trail reporting could also be a huge win.
#6: The persistent “Work Items” screen – Because commercial lending today typically involves different people from different locations in the bank (loan office, credit department, loan operations), one of the most frustrating aspects of this process is the coordination of information and work across these lines. There is no simple resource in commercial loan systems today to know “who’s doing what?” In the next generation system, coordination will be united via a single “Work Items” screen that shows all conditions, trailing items, exceptions, etc. from the loan’s cradle to grave. The screen will show who has been assigned each work item and whether it has been completed; alerts and triggers can also be generated based upon loan administration rules set up by the bank.
#7: A doc engine tied to the work flow engine – One of the more frustrating aspects of commercial loan work flow is that doc preparation is a one-off process. With new database-driven systems, the next generation loan products will include an integrated doc engine tool that allows the bank to incorporate standard docs or author custom docs and tie them to specific products/stages. Today, banks typically have standard docs generated from commercial software and custom docs sitting out in Word files. This would be blown away with the next generation system.
#8: Imaging integration and content management – With the doc engine incorporated into the origination application, the next generation system would also incorporate document imaging and electronic file folder into the heart of the application. The winning vendor will provide a simple tool set and a library of interfaces built for integrating electronic “content management” into the commercial work flow system.
#9: B2B as far as the eye can see – The next gen system will also have a nice library built of XML business-to-business connectors that automatically integrate things like UCC Direct, title, credit, and D&B.
#10: The funding screen and closing screen – A really maddening aspect of commercial lending is the massaging that goes on when a loan is booked and needs to be boarded onto the core servicing system The next generation loan system will have a closing/funding screen that allows the Loan Ops group to essentially direct balances, fees, etc. to the appropriate sub-system and G/L accounts on the core system.
#11: Commercial experts to drive deployment – The most successful commercial lending automation vendor in the future will not only be staffed with technologists, but with experienced commercial loan operations and credit professionals who can help clients truly reinvent their commercial processes. Most software teams are woefully weak concerning this specific business knowledge.
#12: A thriving peer community – The “word of mouth” network regarding software is very strong in the commercial lending world. The winning vendors in the future will leverage this active peer-to-peer community among commercial lenders. They will facilitate best-practice sharing, certify developers and administrators of the application, and even allow a shareware type community to thrive for tools and work flows.
The strategic requirements listed above will be no easy task for vendors to develop and no cake walk for banks to implement, either. However, if pursued with discipline, it’s clear that our industry has the technology and tools to really reinvent the age-old commercial loan process. Let’s get to it and may the best vendor win!