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Lending Briefing: Commercial digital lending — a lifeline for mid-sized banks?

  • Commercial lending is also one of the least digitized areas of operation for most lenders, as paper-based processes continue to be the norm.
  • As commercial loan underwriting is tailored to each business, digitization can allow banks to differentiate themselves in areas that have become commoditized.
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Lending Briefing: Commercial digital lending — a lifeline for mid-sized banks?

When it comes to digital lending, most of the spotlight has been on consumer or small business lending. A less talked about area, however, has been commercial lending – such as commercial real estate lending and commercial and industrial lending. 

This segment is hugely relevant to mid-size banks, which are squeezed in between the bigger banks and fintechs, especially in this new digital competitive arena. 

But commercial lending is also one of the least digitized areas of operation for most lenders – paper-based processes continue to be the norm, while tasks like underwriting and servicing still mostly rely on people, according to Alex Johnson, fintech research director at Cornerstone Advisors. 

And today, the competitive landscape is changing in favor of digital savvy lenders as the pandemic brought online experiences into the mainstream, and new technologies increased data accessibility. 

One thing to keep in mind is that, in essence, the process of digitizing banking services moves the focus from selling a product to fulfilling a need. So as commercial loan underwriting is tailored to each business, digitization can allow banks to differentiate themselves in areas that have become commoditized. 

Therefore, customers won’t be won over by being offered just a product, but rather on how this product is delivered as well as the tools available to support and enhance its value. One way to do this is to become embedded in the business’ day-to-day operations and collect data more effectively to underwrite the loan, yielding a better customer experience. 

“The opportunity for mid-size banks is to embed their revamped commercial lending capabilities into the new business management and finance platforms that corporations are adopting,” Johnson said. 

Facing shrinking net interest margins, mid-sized banks “must proactively disrupt their existing loan distribution channels and cultivate new digital lending ecosystem strategies to drive growth,” he argued.

And fintechs are already eyeing this market, making its way into B2B as it did in B2C. 

You have corporate credit cards and expense management fintechs like Brex and Ramp, while companies like Clearco and Pipe are giving businesses new ways to access capital. 

There are also fintechs like Newgen that provide digital lending platforms for banks and credit unions.

So while digital lending isn’t new, it is becoming more common and customers are always expecting more. Partnering with technology companies looking to bridge this gap can be an opportunity for banks to remain competitive in the digital arena and bring more value to their customers. 

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Chart of the week

The banking/lending tech sector experienced the highest levels of international funding activity in 2021 among fintech sectors, reaching $43.4 billion according to the latest FT Partners’ new Fintech Almanac. 

Around 40% of the volume raised and deal activity was recorded in North America. Some of the largest banking/lending tech financing transactions last year included US residential solar financier Goodleap raising $800 million, bringing its valuation to $12 billion, and Chime raising $750 million to value the company at $25 billion.

Source: FT Partners

Quote of the week

Paolo Sironi, global research leader in banking and financial markets at IBM Consulting and FinTech author, argues in his new book that banks and fintechs need to embrace platform theory in order to survive.

“Everyone that thinks digitizing a bank just means to sell products on a digital medium, however streamlined, optimized or fancy the experience is, will not succeed. Those who understand the value comes from somewhere else in the banking relationship, where operating as a platform allows this value to be unlocked, will be capable of succeeding. 

“The new value comes from the fact that the transaction is not the key element anymore, it is the new way people can engage in the frictionless economy and digital interaction. This allows them to monetize a new value that wasn’t there before because they can now orchestrate interactions that you could not before.”

What we’re reading 

  • CFPB warnings of bias in AI could spook lenders (American Banker)
  • El Salvador partners with DeFi lending platform for bitcoin-backed SMB loans (deBanked)
  • Experian to allow consumers to create their own credit reports (WSJ)
  • How LendTechs are transforming loan access for SMEs (Fintech Global)
  • ​​SEC reportedly probing crypto lending products by Gemini and Celsius (CoinTelegraph)
  • LendingClub beats Q4 earnings and delivers profits (Lend Academy)

What we’re writing 

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