Commercial lending can be an attractive business for the disciplined and efficient lender, but it is no longer a pure margin game won by the largest player.
Corporate clients have become sophisticated shoppers. They are looking for the best products and pricing available. It is now common for them to have relationships with several providers of financial services. Meanwhile nonbanks keep expanding into commercial lending with lean, efficient, highly specialized units that are effective competitors.
What best practices will the future winners in commercial lending winners utilize? Firstly, they will increase the effectiveness and efficiency of their sales process.
Too much emphasis has been put on having well-rounded relationship managers who prospect, sell, cross-sell, and service major relationships.
A specialized sales unit may be given responsibility for targeting, identifying, segmenting, and initially contacting and qualifying prospects. Product specialists would bring support once needs and expectations were determined. The commercial loan specialist summoned would be an underwriter, with loan approval authority.
Now visualize a pricing structure that directly correlates to the risk of the deal as well as the cost of covenant compliance monitoring. A standardized approach based on factors such as the size and type of customer and the size and complexity of the loan will provide fast loan approval. To further streamline the process, deals under $1 million may employ automated decision-making tools such as credit scoring or artificial intelligence.
Once the credit decision is made, automated document preparation and efficient loan closing and booking must support the loan process. Though this is usually viewed as just an operational necessity, it can greatly affect a client's perception of your bank.
Consider the convenience of an automated system that produces required loan documents - with linked customer and loan information - and includes a checklist to ensure that all necessary procedures have been completed. For complex deals requiring amendments to standard documentation, the bank may use an established electronic link to outside legal counsel already versed in its documentation and service standards.
With regard to loan servicing, consider a specialized unit designed to oversee the portfolio maintenance function, including collections and past-dues, as well as ensuring receipt of updated financial information for covenant compliance monitoring. This unit could ensure that the loan renewal process was virtually seamless to the client. Also, the unit's familiarity with the credits would enable it to recommend price changes and suggest opportunities to cross-sell products and services.
Our research shows that this capability can increase products per customer by up to 50%, particularly in serving small and midsize enterprises. Furthermore, such back-office support allows relationship managers to focus entirely on clients - their needs, expectations, and the best way to solidify and further develop the relationship.
Lastly, a fundamental shift must occur in commercial lending customer service. Banks must view corporate clients as they do retail clients, asking: What services and/or information do they readily need?
What is the most convenient way to access required information? Mr. Pihl is a principal and Mr. Heuton a partner in Arthur Anderson LLP's financial services industry consulting practice. They are based in Chicago.
