In today’s credit environment, under-served commercial credit markets need funds to grow their businesses and under-served consumer credit markets need short-term, low-dollar personal loans. In the past this has presented a challenge to community banks. To fill the vacancy, alternative lenders have emerged to offer credit financing.
New Loan Competition
In the past, community banks would lend money only to applicants with good credit histories who met predefined standards. They would avoid applicants with poor credit histories or who fell short of their standards.
Today, the lending market sees new competition from online-based lenders that meet different specific borrowing needs. Large banks are offering what was the primary domain of community banks.
The Need for Small-Dollar Loans
Reasonably priced, short-term loans are ever more important. Many American worker families live on each paycheck without any emergency cushion. Many are unable to meet an unexpected expense of $400.
This demand for small-dollar financing is partially met through credit cards, short-term installment loans and overdraft options. In 2013, FDIC and OCC (Office of the Comptroller of the Currency) guidance took away the ability of many strictly regulated banks to offer emergency credit deposit advance to compete with alternative lenders. This drove customers from community banks to alternative lending sources.
Payday Loans Fill the Gap
Small-dollar loans from community banks require a predefined standard of a pre-existent customer relationship in good standing, a checking account with regularly scheduled deposits, a loan limit, and a recognized guarantee to repay. This predefined standard is easy to satisfy by customers who do not need a loan.
In contrast, loans from payday lenders require no customer relationship, only a paycheck as proof of ability to repay, and few if any financial disclosures. Payday lenders are criticized primarily for extremely high interest rates and because they often subject late payments to relentless collection actions and lawsuits.
Still, payday lenders fill a public need. According to the CFPB (Consumer Financial Protection Bureau), payday loan companies gathered roughly $3.6 billion in fee revenue in 2015 from an estimated 15,766 payday loan stores in the U.S.
Small Business Lending Challenges
After the Great Recession, some predefined standards opened the door for large banks and alternative lenders. Traditional banks needed business model redefinition to capture their share of this $1.54 trillion market. With 98% of banks with less than $10 billion in assets offering small business loans, it remains a core product for them.
The Federal Reserve and the Conference of State Bank Supervisors found small business lending at community banks fell by 2.2% in 2016 while larger bank lending grew by 5.1%.
A survey from Mercator Advisory Group found that three quarters of small businesses delay routine purchases at least once or twice per year because of cash flow issues. Mainly due to restrictive predefined lending policies of local banks, mainly small businesses will seek credit wherever they can.
The trend may be turning. Biz2Credit Small Business Lending Index reveals business loan approval rates at banks continue to climb in the fourth quarter of 2017. Since small business loans drive inquiries into other banking products, small businesses are taking advantage of deposit services and cash management.
Recently the OCC rescinded its Guidance on small-dollar loans. Some financial institutions now see an opportunity to help the under-served market. OCC noted its Guidance not only hurt the consumers it intended to help but continuation would subject banks and federal savings associations to potentially inconsistent regulatory direction.
Balance the Risk
Using powerful collection systems with strong reporting provides banks with loan collection data to better measure risk tolerance and loan effectiveness. Banks with the best debt retrieval capabilities can monitor specifics during the loan life and assign appropriate bank collection workflows that yield the best possible results.
Proven collection systems automate work flows guaranteeing key steps are completed and documented, boosting compliance while containing collection costs. Providing a 360-degree borrower view of all accounts, gives key information to next step collection decisions.
A flexible system permits financial institutions to effectively manage risks associated with products they offer, including credit and compliance.
Article Source: How to Grow Community Banks