As construction lending starts to make a comeback, many community banks relying on lending to developers and builders are looking to use cutting-edge digital interfaces to help them attract more clients.

“It’s important for us to create convenience not only for our clients but for their clients as well [such as subcontractors] and give them quicker and more convenient access to funds,” said David Veurink, chief credit officer and head of commercial banking at Chicago-based Countryside Bank.

About 56% of Countryside’s total portfolio consists of construction loans; residential construction lending “is a core niche of our commercial bank,” Veurink added.

Earlier this year the bank rolled out a digital offering from vendor BankLabs, a division of Radius Group, called +Pay, which automates payments between builders and subcontractors. It speeds the process by eliminating the need for paper with electronic lien waivers and invoices and automating 1099 tax reporting.

Survey responses from the Fed on construction lending demand

“Historically it has been a very paper-oriented process,” Veurink said. Subcontractors "have to wait for paper checks, and in a lot of instances entire draws are held up because you have to get the paperwork in order. We feel [this] is a big differentiator for us.”

BankLabs is one of several technology companies looking to help banks modernize and streamline the typically manual and paper-based processes of construction lending, including fellow fintech Built Technologies. Large core providers such as Fiserv also offer construction lending software.

Tech investment by banks “has typically been light” in construction lending because of recent history, said Craig Focardi, senior analyst at Celent.

“A lot of community banks and other institutions went out of business or had significant losses as a result of construction lending, causing the withdrawal of many lenders in the market and the underinvestment of technology in this area,” he said. “Now, with single-family and multifamily [construction] growing and Fannie and Freddie programs designed to provide financing in the area, more lenders are looking to get back into this niche segment.”

Digital tools to help builders pay their subcontractors could help banks stand out in the customer experience, Focardi said.

“Builders are always managing subcontractors and need to pay them on time to keep them on job and get work done; if they don’t have ready access to funds then work can potentially slow down,” he added. “Offering an automated system for the draw to be taken can help the builder keep their relationship with subcontractors running smoothly.”

Around 85% of payments between builders and subcontractors are currently paper-based, says Matt Johnner, president of BankLabs. “There’s a lot of digitization around B-to-C payments, but not as much around B-to-B, so we see a real opportunity here,” he said.

According to Countryside’s Veurink, offering such digital services “puts us ahead of the curve in how we approach construction lending in the market.”

“We are pretty early in the rollout, but so far the customer feedback has been very positive,” he said.

Digitizing the construction lending process can also help banks as these companies come under new, younger leadership.

While banks have long sought to attract the millennial retail customer, some construction companies are now run by millennials who want these services, said Lexie Garrison, chief credit officer at Oklahoma City-based Valliance Bank, another community bank with a large focus on construction lending.

“There are those who worked for a larger builder and are now going off on their own, or taking over the reins of a family business, and they’re looking for [digital services],” she said. “It’s something they’re used to their whole life and can help a bank stand out when it comes to construction lending.”

Bryan Yurcan

Bryan Yurcan

Bryan Yurcan is a senior writer with American Banker, with a focus on financial technology.