…and the implication for Local Banks, Start-Up Lenders and Credit Unions. By Kim Minor, Senior Vice President, Marketing at Provenir.

To meet and exceed customer expectations, financial institutions of all sizes must have the right technology in place to reduce operational complexity, costs and management overhead, while ensuring agility, scalability and data security.

Cloud technologies have been the industry salvo, helping address the desire to accelerate speed-to-value; the need to reduce IT complexity and simplify integration; and the responsibility to address data security and compliance mandates.

Data is at the core of today’s digital business. The cloud has given birth to many new business models through speed to insights that provide competitive advantage and agility to ensure organizations have the right products, resources and strategies in place to best meet customer needs.

One such advent is Decisioning-as-a-Service, which gives organizations the opportunity to access decisions on demand formulated via rules to inform business processes which offers speed and agility without the cost and complexity of building out this infrastructure on premise.

Decisioning-as-a-Service

What is “Decisioning-as-a-Service”?

Decisioning-as-a-Service allows financial institutions to access risk decisioning technology, an array of third-party data sources, and decisioning expertise on an on-demand basis to make accurate credit decisions in real-time without the high-dollar overhead of credit decisioning infrastructure. This streamlined process enables organizations to simply feed the applicant information into risk models, and via Decisioning-as-a-Service, receive decisions in real time.

One vertical industry where this is a game changer is in the small, local banking, lending and credit union sector. A report from UBS surveying more than 200 IT decision makers working in 175 banks across the country reveals a huge disparity in technology budgets. According to the report, in 2019, JPMorgan had a technology spend of $11.4 billion. However, half of those surveyed from smaller banks with between $51 billion and $100 billion in assets spend less than $100 million on technology annually.

Assessing risk is vital for small businesses and banks to understand who to offer credit to, especially for unbanked and “thin file” or even invisible consumers, where traditional credit score information is not available. But having the right decisioning infrastructure and personnel in place can being incredibly cost-prohibitive, making it difficult for small banks to compete.

Local banks and credit unions

Local banks and credit unions need to stay on top of technology however, to meet the speed imperative. According to recent research, unless a financial institution can open a new account or complete a new loan application in less than five minutes, the potential for the consumer to abandon the account opening increases to as much as 60 percent or more. Alternatively, faster account openings reduce abandonment rates down to 25 percent or less.

Additionally, the COVID-19 pandemic has introduced a surge in business uncertainty that will present community banks with both challenges and possibilities, according to the FDIC Community Banking Study 2020. Say study authors, as earnings decline and credit losses materialize, community bank performance is likely to deteriorate, which means smaller banks must work harder than ever before to expand their book of business.

Decisioning-as-a-Service supports the quick onboarding of new customers and upselling to existing clients, but it also expands the reach of local banks and credit unions to empower them to serve more customers – including small and medium enterprises (SMEs). Despite holding a small share of total loans, community banks are a key provider of funding for many local businesses, most importantly by making CRE loans, small business loans, and agricultural loans.

Access to finance: a key constraint to SME growth

This is important, as SMEs play a major role in most economies, accounting for the majority of businesses worldwide and are important contributors to job creation and global economic development, representing about 90 percent of businesses and more than 50 percent of employment worldwide.

However, access to finance is a key constraint to SME growth. Research shows that 44 percent of SMEs look to funding to meet operating expenses, and we can expect this number to grow considerably during emergencies and times of economic uncertainty. The same research found that 56 percent want funds to expand the business or pursue new opportunities.

According to McKinsey research, today in traditional banks, the average “time to decision” for small business and corporate lending is between three and five weeks and average “time to cash” is nearly three months. To support SMEs with faster access to funds, lenders need to build lending processes specifically designed to quickly understand a business’ financial position and possible default risk.

Leveraging Decisioning-as-a-Service for credit risk management

Another benefit to local banks and credit unions leveraging Decisioning-as-a-Service in their credit risk management is they can benefit by being able to better respond to regulatory and compliance changes, “future-proofing” this aspect of their business.

The regulatory burden on small banks and credit unions is a significant challenge. A report from the Federal Reserve Bank of St. Louis examining compliance costs across all banks in a three-year period showed the burden was much greater for smaller banks with assets of less than $100 million. Their compliance costs averaged nearly 10 percent, while expenses for banks with assets of $1 billion to $10 billion averaged just over five percent.

Decisioning-as-a-Service is a tremendous innovation that can provide significant competitive advantage to small banks, lenders and credit unions. The benefits for Decisioning-as-Service also extend to the growing non-bank lending market and even small organizations, such as utilities, giving them access to sophisticated cloud decisioning technology and expertise at a cost that is approachable. As for consumers, Decisioning-as-a-Service will help ensure the availability of a full range of banking offerings to maximize consumer choice.