How COVID has Accelerated the Future of SME Lending

Digital engagement is no longer an option in small and midsize business lending. Investment in technologies and platforms that improve customer engagement and digital exchange of information will make it possible for banks and credit unions to get in front of business customers more efficiently.

The recent pandemic has clearly been an enormous challenge for small and midsize enterprises (SMEs), with many either shuttered or struggling, yet the swift and substantial stimulus measures have provided some buoyancy. For banks and credit unions, while there has been a hard pivot in response to the changes brought about by such schemes as the Paycheck Protection Program (PPP), what’s mostly happened last year in relation to SME lending is an acceleration of change that was already in the pipeline.

Specifically, we’ve seen a speeding up of digitization, with accompanying investment in technologies and platforms that enable the efficiency, customer engagement and digital exchange of information that will make it possible for financial institutions to get back in front of SME customers as efficiently as possible.

Segmentation and the Need for End-to-End Lending

One important challenge for SME lending in this crisis has been segmentation. Typically, in crises, specific sectors take a hit. With COVID-19, macro sectors such as hospitality and aviation have indeed suffered. However, the pandemic’s impact has also been highly “micro-targeted.”

For example, in a normal downturn, most businesses in a strip mall would feel the pain. However, during the pandemic, the take-out restaurant will likely be doing much better than the brewpub. And with traditional default signals muted by the stimulus, granular segmentation is needed to get a better read on an SME’s prospects.

The pandemic has also accelerated the need for end-to-end lending. With limited ability to interact in person, banks and credit unions need better ways to go from application through underwriting and approval to easy onboarding onto a loan platform, so the loan can be closed and serviced through its life. After COVID, financial institutions will have learned how much they have been able to join to create an end-to-end process that minimizes the back and forth and face-to-face contact needed to deliver a credit product.

Consolidation Gives a Boost to Lending Efficiency

We’re also seeing a valuable consolidation within lenders, away from silos such as small business, middle-market and corporate (which is not how SMEs see themselves) and towards channels. One channel could be 100% straight-through processing (STP), automated and digital; another may be semi-automated, with high levels of standardization; while a third channel would be high-touch, white-glove business.

This is arrangement is valuable because it’s an opportunity to consolidate across lines of business and take advantage of similarities. And what’s particularly notable is that technology is no longer the limiting factor. Today, it’s the enabler. Modern-day platforms help make consolidation and automation a reality.

What’s holding back banks and credit unions?

The three ‘Ps’: Process, Policy and Politics. Address these, and there’s value to be unlocked.

Consolidation is also an efficiency boost, as it leads to fewer regulatory changes when all loans are on a single platform, and everything from training to process consistency and data models can be more easily standardized. Finastra is seeing this consolidation across its lending customer base.

Additional Resources:
SME Lending: How to handle high-volume loans – A three-part webinar series:
Part 1: SME and specialty lending overview and 3 strategic pillars to drive efficiencies
Part 2: How to automate SME lending to create a scalable solution
Part 3: SME lending: Real world use cases

Digital engagement Is No Longer an Option

Another trend we’re seeing is that expenditure on digital customer experience is moving from discretionary to mandatory. Today, investing in digital is no longer an option: Without good digital engagement — and with competitors just a click away — banks and credit unions are losing business. In response to PPP, we’ve already seen financial institutions put in place technologies in weeks that might otherwise have taken years. COVID-19 has been the change agent that may have left banking in a better place.

Banks and credit unions can seize the moment and take advantage of this crisis as an opportunity to change the way they do business and stay ahead of competitors.

Three important steps:

  1. Gather and segment data.
  2. Improve digital engagement.
  3. Automate for efficiency.

The Future of Lending

In short, the future of lending can be open, scalable and highly extensible with the right lending solution. Fusion Loan IQ is built on world-class open technology and provides easy integration, automation and extensibility.

Many financial institutions are stuck with legacy, closed and inefficient systems based on decades old technology. Lending is traditionally tedious consisting of error prone and time-consuming manual processes. Finastra’s Fusion Loan IQ streamlines processes and brings systems into the future. Watch this short video to learn more.

  • Implementation: Customize data scrubbing scripts and migrate bulk data with data conversion tool.
  • Integration: Integrate data from external applications.
  • Automation: Straight-through processing for both syndicated and bilateral loans resulting in a 40% reduction in operating costs.
  • Extensibility: No limitations in capacity and is configured to your specific needs.
  • Scalable: Tested with over 2,000 users simultaneously on the system with a 100 GB database reaching back over 10 plus years’ worth of historical data.

Innovation can help make better decisions, work faster and reduce errors. Fusion Loan IQ is part of Finastra’s end-to-end lending solution, which allows banks to seamlessly manage a loan from the very first contact until the very end of the loan’s lifecycle.

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