Have Commercial Banks Reached a Digital Tipping Point?

July 14, 2020 Jim Young

With COVID-19 forcing banks to support a remote workforce, and to rapidly process PPP applications, have commercial banks reached a point where digital transformation moves from "innovative" to "expected"?



Helpful Links

Small Business Lending: Digital Is the New Normal (American Banker)

COVID-19 Market Updates & Resources (PrecisionLender)


Jim Young:
Hi and welcome to The Purposeful Banker podcast brought to you by PrecisionLender. We discuss the big topics on the minds of today's best bankers. I'm Jim Young, director of content, PrecisionLender, and I'm joined again today by Dallas Wells, our EVP of strategy. Today's topic is about one of the potential unintended consequences of PPP, and maybe it's finally forced commercial banking to see the light when it comes to digital tools and platforms. Dallas, the jumping off point for this conversation was an American Banker article. It was titled Small-Business Lending: Digital is the New Normal. Can you give us sort of the Cliff Notes version of this, or actually if we want to be digital ourselves can you give me the SparkNotes version?

Dallas Wells: Yeah. The short version of this, it's a good article. We'll have a link to it. I'd read it if you haven't seen it yet. It starts with some quotes and some specifics from BBVA, so the US division of BBVA which is about a hundred billion dollar bank, and it talks about how through PPP they made over 22,000 loans in about nine weeks. And actually if their volume follows most of what we've seen from other banks, that wasn't evenly spread over that nine weeks.

So a massive spike of volume, and there's a couple other banks mentioned as well, and the point is that basically, even for community banks, a lot of them were doing a year's worth of lending and loan processing in a very compressed timeframe over a couple of weeks.

So they had to, between the volume and the fact that people literally could not come into their branches because the doors were locked because of the lockdowns, this all had to be done online and so it was a functionality that a bank like BBVA has been taking consumer loan applications online for years at this point. It says in the article that it had been on their roadmap to start accepting small business loan applications, but they didn't expect that to be done till probably late 2020, so everything just got sped up and forced to happen maybe sooner than they expected.

The upshot of it is is now a lot of that work is done. It worked well. Customers were happy. Things that used to take weeks now take a couple days, and now from this new foundation that they have in place they're ready to go full on digital online lending for small business going forward beyond triple P. So BBVA is the example. That's where most of the quotes in the article come from, but a few others mentioned, and that's the upshot is that PPP forced us to do this stuff a little faster than we thought. It went well. Now we're ready to do this all the time.

Jim Young: Alright. At the risk of perhaps consigning all of the marketing content I've produced in the past five years at PrecisionLender to the dustbin of history, was it always going to take something like this for commercial banks to "get" it, and I'm using air quotes if you're not watching the video version of the podcast, to sort of "get" digital banking?

Dallas Wells: Well, I don't think most bankers were opposed to the idea. So there's a couple reasons that it just hadn't happened yet in most banks, and that is one, that you just don't have the same kind of volume. In the consumer world, we've already been there for a long time where they're small loans. You touch a whole bunch of them. When you actually look at it in dollar terms at thin margins, you're making a few bucks to make a loan, right? Especially with low interest rates there's just not much revenue left there, so banks had to get really efficient really fast to both respond to customer expectations and to be able to do it efficiently enough to actually do those loans and hope to break even.

So PPP was the first big wave of volume like that on the commercial side in the small business world that was forcing the same kind of things. The other unusual thing of course was that the revenue potential was kind of pre-wired, right? The SBA told you what the terms were and in fact, your check for processing that thing was going to come from the government, not from the borrower.

So you knew how much you were getting and you could kind of back into, "Well how much can we spend on each one?" I saw a few banks that had their kind of back of the envelope, or back of an Excel spreadsheet anyway, calculations of, "Okay, if that's how much we're making, let's make a wild guess at volume. How much time can we spend on each one? How many people can there be involved?" And they were trying to figure out what we would call the gearing ratio on that of like, what's it take to process that?

They pretty quickly realized they just could not be 22,000 loans for BBVA. You just couldn't do it all manually. Some of the biggest banks in the country, the Bank of Americas, the JP Morgans, even bigger than BBVA. They had literally thousands of people, temp workers, people moving from other divisions, and they still needed to make these investments in technology.

So I think it was always going to happen. Banks get the benefit, the efficiency, the speed. They've seen market share trickle over to fintechs. It was always going to happen. It just wasn't always going to happen this fast. It took a lot of the, "We'll do this next year or next quarter," or, "It'll be sometime in some future budget, but not this one," and it just forced it to where it had to happen this time in this budget cycle.

Jim Young: Alright. Well, I appreciate you not totally dismissing all of our content.

Dallas Wells: Yeah, I hate to make five years feel just totally wasted for you, so we'll throw you a bone there.

Jim Young: Thanks. I was actually struck by the fact that BBVA was prominently featured in the article for two reasons. One of this is, I've often thought about as you mentioned kind of resources and small banks and that sort of thing. You can sort of have that explanation again, volume and resources. Like, we just don't have that to do it, but BBVA obviously does, and the other thing is is that they've got a reputation in the industry as being a pretty innovative bank, and so I guess I'm wondering why would it take them till this point to get to this point when it comes to digitizing on the commercial side?

Dallas Wells: So part of it, even for BBVA, they are big and they have lots of resources, but they're big, right? And they're actually fair amount of their decision making actually happens at the mothership in Europe, so it's really complicated to do these big, all encompassing transformations like this, and so you kind of do it when you're forced to is part of it. But I think the other thing is that for business, even small business, and as you work your way up the scale this becomes more and more true. Up the size scale. So as you move up to business banking, the middle market, to the bigger corporate stuff, it becomes more and more of a relationship business, and it is people centric, right? So the deals are bespoke. Loan terms are customized. The different mix of products that you're going to need to cross sell. You know, there's not a simple way to make a package like there is for consumers of you get a checking account, you get a savings account, you get a credit card.

It doesn't really work that way for businesses because the needs are just so diverse and so complicated, so that means that you have to have humans involved. And so since people were going to be involved, it was always like, well, people are touching this thing anyway. We can keep shuffling the paper. We can keep using some of these analog systems. It's okay. We'll survive it, and there's not this overwhelming volume where we can't do it since we have to touch it anyway.

So a lot of banks were kind of picking at the fringes, and doing digital stuff around the edges, BBVA included, and this was the first time where it was like, "Okay, we got to take the big bite of this and do digital through the whole thing, not just around the edges," and I think what what's going to be interesting now is that going forward, banks of all sizes are going to have to figure out, how do we make this digital, but still keep the people involved in the right way? And that's going to be the nuance for the commercial side of the bank through this next cycle.

Jim Young: That's what I was wondering, and apologies if I don't totally understand full implementation beyond lines of business and when it happens that way or when it happens specifically within line of business, because this article is about small business lending and you mentioned that. I mean, that's volume and they're talking about e-signatures and application portals, and it doesn't sound a whole lot different from my mortgage or something like that. And so, is there a possibility that what we're seeing here is, okay, yeah, we can make this next step, but again, when we get up to these really complex deals that require unbelievable amounts of documentation and multiple people in the room and multiple conversations over multiple weeks, then yeah, digital at that point, not so much. That's not going to ... You know, this is the easy next step, but then really, I guess that's my question. Is there a digital step beyond that? And then, how does that work when you have to have humans involved? What are we talking about?

Dallas Wells: You're exactly right. The very small business, and different banks use the terminology differently, but at the smallest end, almost a micro business account, it gets really actually commingled with the consumer world. You have somebody who's an Uber driver, or they have a stand at the farmer's market, and the personal and business funds are commingled and it's hard to tell which is which sometimes. That eventually shifts somewhere and it becomes more of a true small business, has its own dedicated accounts, has some employees who are involved, and so that's where banks have started to make the transition to make that stuff digital too, and I think the hard part is that these deals are still hard enough, complicated enough that you can't underwrite them with an algorithm, right?

Small business you can. Places like Square are doing this now for those small businesses where they're like, "Look, we can see your credit card volume flowing in and out. That's enough for us to make a credit decision. We can extend you some credit based on just cashflow and what we can see running through your accounts." Once you get to, and again, the cut line is different in different banks. There's some banks where they're like, "Look, if you're borrowing less than a million bucks, we're going to kick it down to the small business group. They're going to try to do it really efficiently. Lots of digital, lots of algorithms, and then above, once you get that second comma in there, that's when people will touch it more often." There's a lot of community bankers listening to this like, "A million dollars is a big deal," right? We definitely have people touching those that are 750,000.

So that cut line is in different places but at every bank there is a cut line of, where do we touch it versus where do we automate as much of it as we can? That cut line is moving across the industry, so wherever it is for your individual bank it's moving higher and we're getting better able to handle in a standardized, efficient way larger and larger deals.

When you cross over that, at pretty much any bank, once you start talking about a $20 million transaction, that's going to take a human analyst to underwrite it, to understand all the nuance and the sophistication around that deal, the complexities of that deal, and it's going to take a committee of people sitting around a table to actually make an approval and to agree to put that much of the bank's capital at risk.

So can it be fully digital? Can somebody put an application in online, get an answer back in two days, and then do an e-signature and then the money's in their checking account? No, those aren't going to work that way anytime soon. So what banks have to do instead is they have to enable the bankers with digital tools, right? So re-keying information in the various different systems is still a big time suck on those sorts of deals at just about every bank in the world. You have human beings taking and looking at two screens, keying information from that system into this one, because they're just not all connected. You have people sharing things in PDFs, right? They call that digital because it's not printed anymore. It's a PDF attachment on an email. That's not quite what digital means.

So as those systems become more connected, information starts being shared in APIs, the data lands in a database somewhere where you can actually access it and do stuff with it. Simple things, and for multimillion dollar transactions, things like, well, we don't actually know a year later what fee they paid on that without going back and looking at the file because that fee got dumped into a general ledger and we just lost it. There's no record of it anywhere in our digital systems. Or the collateral. Well, that's stored in the underwriting credit system, which is not attached to anything. It's just dumped in its own system over there. So we know what it was originated with, but we can't go back and say, "What's the collateral now? What do we think it's probably worth? We can't update it in any way."

Those little pieces are things that banks are now investing in and trying to figure out, how can we make those digital so that our humans can make better decisions, they have better information at their disposal, and it's easier for them to see all the connected pieces of these far ranging relationships that touch six different departments in the bank and maybe 30 different systems? How can I actually get a global view of that, get all the people that are involved to see the same thing, and be able to make good decisions around that? That's what digital means in these bigger deals, but it's a moving target as all those things are changing over time.

Jim Young: Yeah, and I guess finally I'm curious about, I mean, you laid out a good case for sort of this analogy, sort of the iPhone version of things, or smartphone I should say to keep it brand agnostic ... Version of things where you take that initial step digitally, and then it opens up this world of digital possibility and suddenly you're listening to podcasts and you're FaceTiming or Zooming or whatever on your phone. You're banking on your phone. On the other side of that is the analogy we used before, which is the Morty Seinfeld with the Wizard. You get a piece of technology, you learn how to do one thing on it to solve your immediate problem, and then you're done with it. And in this case it would be, "Okay, I had this specific issue with PPP. It forced me to do these things. Got it. Great. Okay, now let's go back to what we were doing." And I guess that's what I'm wondering is, do you think that the ideal is sort of that smartphone analogy, but how possible or realistic is it that it's going to be Morty and the Wizard instead?

Dallas Wells: I think there's going to be plenty of banks that do it that way, and they kind of throw away the work that they've done. Because it's sort of, there was lots of things that were very specific about PPP, right? Like there was no need for you to ... Let's be honest. There was no need to underwrite the deal, right? In fact, that was a stated expectation that as long as they met the qualification criteria, so ask them a series of questions. As long as the answers to all those is yes, you're good. Here's the money. When the bank actually has true capital at risk, they have to figure out how to underwrite that thing. I think there's a lot of banks that are going to say, "I just can't get comfortable with that. So that was a onetime deal and I'm just going to basically throw that in the trash because we don't need it anymore."

That's not what banks like BBVA are doing. They're looking at it and saying, "Hey, we did a lot of the really hard work. We know how to now collect the information, it's sorted into the right places, and we have a good experience for the customer. Now we just need to figure out a few extra pieces of it," and so there's more work to be done, right? It's not like you're just ready to erase the PPP on the front page of the website and everything else stays the same. There's a lot more involved with it, but a lot of the infrastructure is there. And so I think most banks seem to be saying, "We've invested too much time and effort and money in this. Let's make good on it. Let's figure out those last few gaps," but there will absolutely be some who say, "I am still not ready to make my own underwriting decisions digitally. I want to do those the way that we're comfortable with and I just can't make that leap yet."

Jim Young: I should probably, again, I know you know what I'm talking about when I use the Morty Seinfeld Wizard analogy, but-

Dallas Wells: It gets more dated everyday though, Jim. You're going to have to start explaining it more often.

Jim Young: I like to think the Venn diagram of Purposeful Banker listeners and Seinfeld fans is pretty ... Is a lot of overlap there, but the analogy is that Jerry gives his dad this electronic organizer and his father uses it to calculate tips at the restaurant. And in this case, PPP would be tips at the restaurant.

Dallas Wells: Yeah, that's right.

Jim Young: And are you going to figure out what else you can do beyond that? Alright. Well, thanks again Dallas for coming on.

Dallas Wells: Yep. Thank you, Jim.

Jim Young: That'll do it for this week's show and again, as with last week's episode, this discussion is part of that larger conversation we're having with commercial banks this quarter about, what's your next move? If you've got thoughts on this you'd like to share, feel free to reach out to us on our social media platforms, or you can even send me an email to J-Y-O-U-N-G, jyoung@precisionlender.com. Thanks so much again for listening, and now for a few friendly reminders. If you want to listen to more of our podcasts, check out more of our content, you can visit the resource page, PrecisionLender.com or head over to our homepage to learn more about the company behind the content. If you like what you've been hearing, please be sure to subscribe to whichever podcast feed that you get, and give us some ratings and feedbacks on any of those platforms. Until next time, this is Jim Young for Dallas Wells. You've been listening to Purposeful Banker.


About the Author

Jim Young

Jim Young, Director of Content at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career Jim has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender, he manages the many ways in which the company shares its philosophy on banking and the power of relationships. Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

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