Are Customers Waiting for Better Lending Conditions?

Many Americans are apprehensive about the economy, believing it is in recession, when this is not, in fact, the case. Unemployment is down, GDP is on the rise , and the Fed’s move to increase interest rates is pushing inflation down .

Of course, interest rates have been at their highest in 22 years, at 5.25-5.5% . Subjective perceptions and steep interest rates have naturally made businesses wary of borrowing, and small businesses are especially concerned about their capacity to weather economic flux if they take on more debt.

However, loan volumes did increase by 0.25% in March this year , indicating that banks are loosening their lending policies in response to an improving economic outlook. And let us not forget the record number of business registrations – they will need funds more than ever now, and commercial lending volumes may not remain depressed for long.

These are conditions where customized, personalized and flexible lending solutions become paramount.

The Allure of Personalisation in Commercial Lending

Commercial lending is no longer about lending alone – businesses want services that help them manage their finances better as well. They want real-time financial data about their debt obligations, custom dashboards, easy access to relationship managers, and bespoke loan products.

This commercial lending trend is the result of a broader change in customer’s borrowing preferences. Today’s customers are used to services that blend human and digital interaction, and anticipate, rather than address, their needs. They have similar expectations from their commercial lenders. According to a report by Capco, 72% of customers want and value personalized commercial services. Many are willing to pay for digital alerts about recurring payments but also desire one-on-one conversations with bank representatives rather than a chatbot for guidance. Those who rate personalization as ‘highly important’ are also willing to share feedback on their experience. All this indicates that they value digitization, but not when it becomes a barrier to smooth operations.

It is a no-brainer that such a clientele would prefer flexible loan terms, proactive outreach, transparent online communication, and simplified and digitized application processes. This is why KPMG suggests not just a core modernization of commercial lending processes, but a broader digital transformation of a lender’s operations.

But technology integration doesn’t just address the customer’s needs. It also helps lenders navigate an increasingly complex and stringent regulatory environment.

The Need for Advanced Credit Decisioning Models

While borrowers value personalization, sophisticated credit decision models are all but necessary for players to thrive in the current commercial lending landscape . Transitioning to such new models is not easy. Many banks face challenges due to limited data sources, simple analytical tools, reliance on subjective assessments, outdated and inflexible models, and concerns about time-to-implementation and regulatory scrutiny.

However, adopting such models gives stellar results – they have boosted revenue by 5-15%, decreased credit losses by 20-40%, and improved efficiency by up to 40%. Automating many aspects of the assessment process and eliminating much of the paperwork helps quickly identify the right customers and improve their experience using straight-through processing. Precise default risk predictions allow lenders to identify the level of provisions and capital they must hold, and case prioritization through automation allows lenders to pay more attention to assessing high-risk but otherwise promising prospects.

Those who adopt and refine new credit decisioning models gain a competitive advantage while remaining compliant with regulatory strictures, retain more customers who value the improved user experience, and minimize risk by segmentation. The advent of advanced credit decisioning models is a trend in commercial lending that answers the needs of borrowers and lenders.

The Tightening Regulatory Landscape

In early 2023, nearly half of senior loan officers at major U.S. banks reported tightening credit standards for commercial and industrial loans due to economic uncertainties and sector-specific risks in response mainly to tightening regulations at the state and federal level.

This commercial lending trend is quite recent – the US government has not traditionally regulated commercial lending, while consumer loans were governed strictly by laws such as the Truth in Lending Act (TILA). Now, commercial lenders must comply with new regulations and guidelines introduced at both the federal and state level, without the sort of uniform framework of a law like TILA.

Tightening regulations are part of a broader push for increased oversight in the financial sector. Regulators seek to enforce sound lending practices where institutions must manage all sorts of risks, ranging from cybersecurity and data privacy to environmental sustainability. Lenders are also under pressure to ensure their practices are not just compliant but in accordance with broader societal attitudes about climate change, social responsibility, and corporate governance. The regulatory landscape is fragmented and fraught with challenges.

According to a KPMG report , commercial lenders rate regulatory compliance as one of the primary drivers for transforming their operating models and processes. Digital transformation automates and standardizes compliance processes, ensures data accuracy and privacy, and is agile enough to adapt to shifting regulatory trends. Technology aimed at addressing a lender’s regulatory burden has been dubbed ‘RegTech’, and is a solution not only to regulatory tightening but also to the risks that come with increasing personalization, flexible loan terms, and meeting other borrower expectations.

Lenders are not just updating their tech infrastructure to meet regulatory challenges. They are trying to make sure that their tech stack is future-proof in terms of customer needs, regulatory changes, and other technological advances in the financial sector.

The Adoption of Cutting-Edge Technology

Technology is now a crucial part of the commercial lending industry. Lenders are using digital tools to boost efficiency and reduce costs while improving the customer’s experience with more personalized services.

At the heart of digital lending processes is automation – and this covers everything from loan origination and underwriting to servicing – and when combined with analytics, it also helps lenders and borrowers engage better with each other – AI and machine learning are helping to identify high-potential customers and also tailor products to their needs.

From speeding up approvals to fulfilling compliance requirements, lenders are resorting to technology to meet business demands. Technology can automate loan document reviews, flag exceptions, and even ensure adherence to regulations both local and federal, letting underwriters focus on higher-value tasks.

Advanced analytics is also helping lenders deal better with risk. Parsing vast amounts of data from multiple sources gives them a comprehensive overview of a borrower’s financial health.

Open banking and Application Program Interface (API) integration are also contributing to digital transformation in commercial lending and both these innovations allow financial institutions and other service providers to share data with more transparency, creating an interconnected financial ecosystem that benefits both the lender and the borrower.

A McKinsey study has revealed that 75% percent of the world’s top 100 banks now offer public APIs. For instance, the consumer division of a major financial services multinational has launched a global API hub, allowing developers to share best practices. In small-business lending, APIs like Plaid and Yodlee are now standard, enablin direct integration of borrower data with lenders' systems . This not only improves the speed and accuracy of credit decisions but also allows lenders to offer more personalized and flexible solutions to borrowers.

Technology does not just benefit the lender – it also gives borrowers what they want. Borrowers expect easy access to information and personalized services. Lenders who can deliver this type of experience are more likely to attract and retain customers in an increasingly competitive market.

RegTech, AI, data analytics, open banking, API integration – all these commercial lending trends 2024 form part of a wider digital transformation in the financial services sector. It is not without its challenges, but it brings significant rewards. A McKinsey report states that such a transformation drives much faster credit decisions, so that customers receive cash up to 80% faster, lowers costs by cutting decision-making time by 30-50%, and improves risk decisions, ensuring greater long-term profitability.

The Rise of Sustainable Finance

Sustainable finance is now on the rise because of a growing consensus on environmental, social, and governance principles (ESG). Both businesses and investors are incentivized to prioritize sustainability, and this has led to a greater focus on sustainable finance.

The issuance of green, sustainable, and social bonds reached a record $6 trillion in 2022 , underscoring the growing demand for financial products that support sustainability initiatives.

This is not just restricted to the US but a worldwide phenomenon, and suggests that a business is more likely to receive funding if it is a green initiative and that it is more likely to thrive if it adopts sustainable practices. Lenders can do this math themselves – and have arrived at the same conclusions, creating financial products such as green loans, and sustainability-linked loans (SLL) that incentivize borrowers to target and achieve explicit environmental or social outcomes.

The Wilmington Trust states that sustainability-linked loans have the potential to grow , especially since any loan can technically include provisions that will impact terms if the borrower does not achieve specific sustainability targets. However, both green loans and SLLs are subject to stringent regulatory criteria and are not free of risks . A KPMG report on ESG risks strongly advises against simplistic solutions – such as abandoning a ‘brown’ automotive supplier – because that would only damage the lender’s reputation.

Sustainable finance is a relatively new trend in commercial lending and needs to be charted carefully – and it is better to use a tech-enhanced approach to its attendant risks rather than use outdated business practices.

The Case for A Complete Digital Solution for Commercial Lending

Given the commercial lending trends we have discussed, the need for an end-to-end commercial lending software platform is evident. The combination of shifting customer sentiment, tightening regulations , and the adoption of technology underscores the importance of a comprehensive digital solution. Such a platform would streamline the entire commercial lending lifecycle , from application to compliance, risk management, and loan servicing.

Technology integration is already underway, driven by both customer demand and regulatory pressures. Borrowers are increasingly seeking software-enabled solutions that offer personalized experiences and simplify the lending process. At the same time, the complexity of the regulatory landscape requires automated tools that can handle compliance and de-risking with precision and efficiency.

In today’s market, an end-to-end commercial lending software platform represents the natural evolution of an industry that has to constantly hit a moving target, simplifying processes for borrowers, addressing the complexity of regulatory norms and managing risks both old and new. For lenders looking to stay competitive and meet the demands of modern borrowers, investing in a complete digital solution is the logical next step.

Conclusion

An end-to-end commercial lending platform is perhaps the only answer to the contradictory commercial lending space. New business applications are at a record high, but so are US interest rates. Technological transformation is underway, but it appears to be on a piecemeal basis. Borrowers want personalized and streamlined experiences, but this requires precise credit decision-making models. Compliance requirements change from state to state – unheard of until recently. Sustainable lending and ESG principles are rapidly coming to the forefront, but are also subject to serious risks. Financial institutions have to capitalize on current trends or risk becoming obsolete.

A platform such as ours is an end-to-end solution, but it is not a one-size-fits-all product . From loan origination and underwriting to reporting and precise analytics, our automated solution propels revenue generation. By smashing silos with a digitized lending platform, our services enable our customers to maximize growth and operational efficiency. Our granular customer insights allow our clients to scrutinize every prospect thoroughly, making informed commercial lending decisions.

A platform such as ours is an end-to-end solution, but it is not a one-size-fits-all product. We cover the gamut of commercial lending – loan origination, underwriting, reporting and precise analytics, propelling revenue growth. We smash silos with our digitized lending platform; our services help our customers operate more efficiently, and our customer insights enable our clients to scrutinize every prospect thoroughly, ensuring that no customer is underserved.

Will such a platform manage to resolve the contradictions in the commercial lending sector? Yes.