Loans for low cash, short term personal use are one key way for financial institutions to cultivate assets. Another option is to underwrite more business loans. Money loaned in both cases calls for robust bank collection software to help loan account officers manage the process and monitor the risks.
Lender sources including non-banks and alternative lender services now compete for customers of conventional financial institutions. The amount of underserved customers and small business borrowers consequently represents a challenge for community financial institutions.
Credit Market Needs are Changing
Credit market demands from today’s consumer and commercial credit customers have compelled banks to implement more flexible underwriting and collection models beyond traditional credit.
This will enable each banking lender to efficiently evaluate risk; confidently recover debt from borrowers; and overcome the situation of non-bank competition.
Loan Competition and Bank Lender Response
Money is routinely loaned for expenses such as home mortgage payments, vehicles and school loans.
Loans to people with poor credit histories was traditionally excluded from the way bankers targeted people for application offers. Access to low fees and APR interest rates was offered to people who fit predefined requirements, since they represented less risk.
However, a growing number of alternative service lenders now form competition in the U.S. lending market. A credit check with low credit score details no longer restricts people from funds access.
For example, payment solution options such as digital platforms now meet borrowing needs. Low interest rate cash funds with favorable payment terms are available to a lot more consumers today.
For example, fintech startups, technology firms, and even commercial and investment banks have all infiltrated what was once the primary domain of community financial institutions.
Cash access via reasonably priced, short-term loans is more important than ever. A lot of Americans require payday loan services as they live from paycheck to paycheck. This leaves a lower amount of emergency funds, unfavorable credit scores, and fewer credit choices. According to the Federal Reserve, nearly half of all American adults say they cannot cover an unexpected expense of $400.
Financial institutions in each state offer low money credit options in the form of credit cards, short-term installment loans, and overdraft services. Prior to 2013, some also offered the service of a deposit advance product for emergency credit.
Unfortunately, 2013 FDIC and OCC guidance eliminated this product. When severely regulated financial institutions lost the ability to offer this viable alternative, it impeded their ability to compete with nonbank lenders.
An ABA white paper suggested the demand for small dollar credit is sizeable and real. It states the needs unmet by financial institutions will drive customers toward “informal” sources.
A payday loan and cash advance Few financial products draw as much criticism as a This high interest rate option is often seen as predatory, due to the inflated rate and how payday lenders subject borrowers to collection actions and lawsuits.
Access to small-dollar bank loan generally involves requirements by community financial institutions. For example, an existing bank relationship; a checking account in good standing; regular deposits; limitation on loan amounts; and an ability to repay.
In comparison, decision on payday loans from nonbanks do not require customers to have a preexisting bank relationship, or limits on loan amounts or quantity. They provide little to no ability to repay analysis; and few, if any, disclosures explaining loan terms and conditions.
Nevertheless, payday lenders moved in to capitalize on needs of modern banking consumers. According to the CFPB, payday loan companies – which are not legal debt collection agencies but are permitted to act to collect debts consumers owe – took in roughly $3.6 billion in fee revenue in 2015. There are 15,766 payday loan stores in the U.S., according to CFPB estimates.
In order to stop debt traps, a CFPB rule issued in October 2017 established tougher ability-to-repay protections.
The new rule requirements state that lenders must conduct a “full payment test” to determine upfront borrowers’ ability to repay loans without re-borrowing. For some short-term cash loans, lenders have the option to bypass the full-payment test if they offer a principal-payoff option that allows borrowers to satisfy the debt incrementally.
The rule allows less risky loan options, including certain loans typically offered by community financial institutions, to forgo the full-payment test. The new rule also includes a “debit attempt cutoff” for any short-term loan, balloon-payment loan, or longer-term loan with a yearly percentage rate higher than 36% that includes access the borrower’s checking or prepaid account.
Shortly after the CFPB guidance decision release, the OCC rescinded its guidance on small-dollar loans. In the case of this step, and the CFPB’s action, some financial institutions see an opportunity to help the underserved and underbanked market.
OCC Acting Comptroller Keith Norieka noted the Guidance not only hurt the very consumers it intended to help but its continuation would subject banks and federal savings associations to potentially inconsistent regulatory direction and undue burden.
Even with the OCC rule’s rescission order, regulated financial institutions are still accountable for compliance with all prudential and consumer laws and regulations.
Small business lending faces similar hurdles. After the Great Recession, most community banks had their hands tied when it came to providing loans to small businesses-providing a window for larger banks and alternative lenders.
To capture their fair share of the profit pool in this $1.54 trillion market, according to Forbes, traditional banks might need redefinition of business models through a more personalized approach and understanding of their target customers and better help in the debt gathering process.
Small Business Lending a Community Bank Core Product
Small business lending remains a core community bank product — with 98% of banks with less than $10 billion in assets offering small business loans, according to the ABA.
Still, a survey released in October 2017 by the Federal Reserve and the Conference of State Bank Supervisors found small business lending at community banks fell by 2.2% to $269 billion in 2016 and larger banks (larger than $10 billion in assets) edged their smaller peers in total origination volume, growing by 5.1% from 2015 to 2016, to $284 billion. The amount of small business loans also declined as percentage of community banks’ portfolios, dipping from 16.6% to 15.9%.
A web-based survey from Boston-based Mercator Advisory Group revealed three in four small businesses delayed routine purchases at least once or twice a year because of cash-flow management issues.
However, it’s not always easy for small businesses to obtain the credit they need, when they need it, due to traditional banks’ often restrictive lending policies. Consequently, small businesses seek credit wherever they can get it, seeking credit lines and loans from financial institutions, nonbanks, and alternative lenders.
For example, Amazon Lending offers short-term business loans ranging from $1,000 to $750,000 for up to 12 months to micro, small and medium businesses selling on Amazon.
Amazon made $1-billion in small-business loans to more than 20,000 merchants in the United States, Japan and the U.K. during the 12 months prior to June 2017. Since Amazon Lending launched in 2011, it surpassed $3 billion in loans to small businesses.
Business loan approval rates at banks continued to climb heading into the fourth quarter of 2017, according to the Biz2Credit Small Business Lending Index.
Any small business loan amount drives adoption of other products, so this is a good sign.
According to the ABA Banking Journal nearly 95% of community banks always or usually provided deposit services to small business borrowers, while 38% provided cash management.
Powerful collection software provides solid loan collection data reporting for banks and credit unions. This can better measure their risk tolerance while increasing loan effectiveness and the ability to compete without compromising credit quality and to recover debt.
Robust reporting also helps sort through the loan risk muddle and allows financial institutions to retain some prudent underwriting and risk management principles.
Over the servicing life of their loan portfolios, banks and credit unions with debt retrieval capabilities can leverage specific scores such as contactability, collectability, and overall recovery. A robust collection system can assign the best channel for appropriate bank collection work flows. It can also enable collections professionals to yield the best possible results for the financial institution.
Proven best-of-breed collections systems with automated work flows ensure key steps are completed and documented. These information details boost compliance and contain collection costs. They aid decision making by providing a 360-degree borrower view of all collection accounts.
A flexible system for offering credit and operations products improves the reputation and ability of financial institutions to effectively manage risk and maintain compliance.