By Kristen Lista, Principal Product Manager, Product, Platform and Technology, Finastra
Financial institutions that serve small and mid-sized enterprises are losing market share to agile, digital-driven competitors—especially in the lending market.
For financial institutions of all sizes, small and mid-sized enterprises (SMEs) comprise a crucial segment of the market. As inflation and new tariff policies increase the cost of goods, SMEs' need for capital is growing, creating opportunities for lenders.
Yet despite the importance of these clients and prospects, financial institutions' (FIs) disparate systems and legacy technology infrastructure can make it difficult to serve SMEs' needs. As a result, these clients are taking their business to competitors—in many cases, non-bank financial institutions. To stay competitive in today's market, FIs need to integrate their systems and deliver on SMEs' expectations of a connected servicing ecosystem and a streamlined borrowing experience.
SMEs demand seamless, efficient customer experiences
FIs increasingly face fierce competition from non-bank financial institutions (NBFIs), particularly in the lending market. With their agile business structures and embrace of digitization, NBFIs are setting the standard for a streamlined, consolidated, integrated and automated customer experience.
For example, traditional FIs often lack the technology to quickly validate documents like tax returns and financial statements. In contrast, NBFIs are partnering with third parties to streamline these verifications—often without needing to collect documents directly from borrowers. NBFIs further accelerate the process by leveraging automation to verify bank statements, deposits and cash on hand, whereas traditional FIs have been slower to adopt this level of automation. NBFIs are also ahead of the curve when it comes to automated underwriting and advanced credit risk modeling that drives faster decision-making and funding.
As a result, SMEs can often secure approval for a credit facility from an NBFI in a matter of minutes—and they're migrating away from FIs.
Disconnected systems and outdated technology erode trust with SME clients
The competitive landscape and evolving expectations among SME customers are pushing FIs to evaluate their technology stacks and create a more connected and efficient loan lifecycle. But disconnected systems or gaps in automation can lead to delays, redundant document requests, or inconsistent communication—all of which erode trust with SME clients. And while financial institutions may recognize the need to transform their loan servicing systems, many lack a clear vision or roadmap for tackling these challenges. Moreover, limited IT staff and insufficient in-house expertise can make it more difficult to build an end-to-end solution, with smaller FIs often relying on external partners to bridge the gaps.
In addition, because they're not viewed as a customer-facing function, financial institutions' back-office operations are often underfunded—which presents another obstacle to upgrading loan servicing systems. Fortunately, FIs are increasingly recognizing the impact of back-office operations on the customer experience, as well as the ways in which improvements to these systems can boost revenue.
Consolidating disparate components of the lending ecosystem can help FIs streamline the lending process to better meet SME borrowers' needs and expectations. For example, managing a variety of different vendors can be demanding and resource intensive. By consolidating vendors, FIs can reduce the vendor management burden.
Consolidating the lending ecosystem also yields benefits in the area of data management, including improved consistency across commercial and corporate lending, enhanced regulatory and financial reporting, and reduced risk of data inconsistency.
Simplified Servicing empowers FIs to thrive in a changing marketplace
In light of evolving demands from SMEs and stiff competition from NBFIs, financial institutions need to take a more strategic approach. When it comes to building a consolidated, integrated lending ecosystem, some FIs have outlined a vision—and now they need to use technology to execute it.
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The competitive landscape in commercial and corporate lending is rapidly evolving. Particularly when it comes to servicing SME borrowers, financial institutions can be at a disadvantage due to legacy technology, disconnected systems and limited resources. With non-bank financial institutions leveraging automation and delivering faster, more seamless service, traditional FIs need to embrace a consolidated, integrated approach to loan servicing—or risk being left behind.
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