Smaller banks not committed to online credit

While marketplace lenders brag about quick turnarounds from their online credit applications, most banks have yet to really commit to the idea.

So says Brad Smith, managing director, technology solutions, at Cornerstone Advisors in an interview with Banking Exchange. Smith has spent years working with community banks and regional banks and he says most still don’t seem to buy into true online applications. They haven’t invested in adding search engine optimization and other features to their online credit applications, he says, that would make them more suitable to their footprint.

Even when they do offer such service, behind the curtain nothing has changed, according to the consultant. Smith says typically the banks continue to treat applications filled out online as if they’d been taken in a branch. The only change is that customer is inputting the data, “outsourcing” a bit of labor. But analysis and other stages still retain a strong human element, says Smith.

Bad start makes for queasiness

With the potential competition of online marketplace lenders on the scene, who offer ease of application and who promise speed, why do banks hesitate?

Smith says that among smaller institutions that dipped their toe into online applications the typical result was to see applications come in from “seven states away,” says Smith. Prospects were people out of market who were trolling for credit, not the targets that the banks were looking for.

“So the early entrants didn’t have a lot of success,” says Smith.

New research the firm completed earlier this year indicates that interest in online account openings may be stagnating. However, Smith suggests bankers often need to be ready to commit to the entire journey, not just the first stage.

According to a survey of banks and credit unions in the fourth quarter 2015, asked about digital technology plans, 28% said they intend to improve utilization of online account opening overall and 23% said they intend to add new systems or replace existing ones. In a similar survey conducted the year before, respondents indicated an equal interest in improving utilization, but not as much interest (only 15%) in adding new or replacement technology in the overall online account opening area.

However, specifically in the area of only loan origination, executives’ mindset seems less definite. In the latest survey, 25% of the sample say they intend to improve utilization of this technology and 14% will add new system or replace existing ones. However, in the year-earlier research, more respondents (29%) intended to improve utilization. (And 10% said they would add or replace.)

This is in keeping with the decline in four other areas of loan origination studied. In each—the other four were consumer loan origination, mortgage loan origination, commercial loan origination, and loan stress testing—there was a year-to-year drop in utilization efforts.

Although the survey report notes that this was somewhat made up for by increases in institutions adding new or replacement systems for each technology, the survey pointed to the overall picture with caution.

“Considering the importance of lending as a growth driver and the improvement of turnaround times at big banks,” the report states, “we’re concerned that community financial institutions are still slow to adopt loan origination systems for faster turnarounds, improved risk management, and a more streamlined approach.”(Traditionally, community banks have portrayed large banks as a credit approval quagmire, versus the benefit of dealing with local decisionmakers.)

Smith thinks online lending is a coming thing for many banks. True online lending is typically credit scored, and Smith thinks the industry is being pushed in that direction not only from the viewpoint of efficiency, but to ensure better compliance with fair-lending law through automated evaluation.

Do executives “get” online yet?

No one expects every bank to be on the leading edge of website look and feel every day, all year. But in a world where many major players make significant changes all the time, there appears to be a disconnect.

Cornerstone saw cause for concern in the relative drop of  interest in expanding online presence among the sample from year to year. In the latest survey, executives asked what their growth priorities were reported that expanding online presence was a priority for 28%, ranking seventh for the year. But in the year-earlier survey, 36% considered this a priority and it ranked fifth.

This does seem counterintuitive. Cornerstone’s report expresses some puzzlement.

“Bank CEOs are underweighting the importance of digital channels,” the report states. “Many believe that site refreshes and online banking updates are sufficient. With the rise of digital-only firms like OnDeck in the small business lending space, community banks’ lack of emphasis on expanding their online presence is surprising, and a cause for concern.”

Interestingly, elsewhere in the survey nearly a third of the banks in the sample (32%) says a technology priority for 2016 is evaluating and potentially replacing critical systems.

“The nearly doubling in the percentage of banks that will evaluate and possibly replace critical systems reflects CEOs’ growing understanding of the limitations that older technologies are putting on their businesses,” the report observes.

Small business side lags the curve

Appropos of the report’s comment about OnDeck and similar competitors, in his interview with Banking Exchange Cornerstone’s Smith was not surprised by the lack of energy to be on par with the likes of OnDeck.

While many big banks have made small business lending an offshoot of their retail networks, making the credits more like personal loans, community banks typically have not gone there yet.

For now, they prefer to keep more of the human element in the business credit area. Time and results will show who has the last cheer.

Download What's Going On 2016: Cornerstone Advisors' Take On Community Bank And Credit Union Priorities And Technology Plans [Registration required]