Three Tips from Google to Navigate the Storms in Commercial Banking

Self-driving cars are the nirvana for many commuters in the United States. The concept of being able to drive without driving and focus ENTIRELY on something else, while you are being safely piloted to your destination, is the stuff of dreams. The great thing is that it is not too far in the future and has just a few hurdles to get over—and Google’s sister company focused on self-driving technology, Waymo, is making huge progress in this area.

Likewise, the concept of a fully digitalized experience for commercial lending—where the application and underwriting are optimized and streamlined to only high value-added human insights, and the portfolio is scoured constantly looking for threats or even better opportunities—is here today. For most financial institutions, it will require just a few hurdles, mostly with culture and risk appetite, to overcome. So let’s take a few pointers from Google and Waymo and see how they are overcoming similar challenges and how you can apply those approaches to your digital process.

Capture Your 360-degree View of the Situation

Like any good journey, you need to start with the destination in mind. Likewise, you will want to understand the lay of the land, construction sites or delays to avoid, weather conditions, etc., so that you can reach your destination. We have seen that successful institutions are leveraging insights in a similar fashion to minimize risks; and for those that are not there yet, it is a key priority. In a recent McKinsey survey, only 5% of credit managers thought they had a holistic view, but 39% have planned to get to that state.

For example, LiDAR technology as used by Google scans constantly for objects around the vehicle—pedestrians, cyclists, vehicles, road work, obstructions—and continuously reads traffic controls. And it does this from up to the length of three football fields away in every direction. So ask yourself: Are you pulling in all the application, collateral, financial, and relationship data and insights to ensure you are making the best decisions possible? 

Also, I love a good co-pilot on a long road trip; someone who can help navigate, select the right playlist, and make sure I am not making any wrong turns. Taking all this data and insight, and then applying the right level of collaboration to call out the unique expertise that you have in your bank, allows you to not just make decisions, but to make fantastically effective decisions that impact your portfolio in a positive way for the long haul.

Leverage Your Core Strengths

A lot of bankers I speak with frequently feel overwhelmed by their fintech competitors. They believe that the fintech equivalent is more agile, with a sleek look and feel that attracts more customers. And while we cannot discount that at times, I have to remind them that they have huge advantages over those competitors, such as the ability to offer much more competitive rates (sometimes by more than 10%), a history of navigating downturns (most fintechs started after 2008), and so many other compelling plays—not to mention the terabytes of data on your best and most profitable commercial customers.

Just like Google leverages their data analytics skills in analyzing the millions of miles driven by cars, banks need to leverage those pricing advantages, deep relationships, and massive amounts of commercial client data to dominate the market.

So while nearly 60% of the business lending market is looking to a more “fintech” digital experience, your institution has the ability to compete with a choice of strategies that depends on how much investment of time and money the bank is willing to make to enter the new marketplace, and the level of integration the bank wants between the new digital activities and their traditional operations.

Test for the Worst of Conditions

One of the areas that Google has admitted that the self-driving cars are not ready for is the handling of rain, snow, and severe weather. With that in mind, they are shifting the test driving from sunny locations like Phoenix, Austin, and Palo Alto to one of the wettest cities in America—Miami. The hope is that with new data during rainstorms, or even worse storms, Google can learn how these cars should drive in any condition.

So how about your portfolio? Are you testing it to see how it can perform in the worst of times, and not just during a growth period? In commercial lending, we always look at the pricing of the deal and we then make the assumption that the deal is good and we should just sign off on it. But are we looking at the flip side and adequately seeing what the expected credit loss would be, and stress testing the credit, way before we get into these situations?

One comment I hear often, especially from community banks, is “I know my C&I customers so well, that I know what is going on in their business before they do, so I don’t need to be worrying about what is going to happen next”. However, per the OCC's Guidance on Stress Testing Community Banks, "Community banks, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes … The OCC encourages community banks to adopt a stress test method that fits their unique business strategy, size, products, sophistication and overall risk profile."

So with no real excuse, ask yourself—are you ready for the storms? Do you have your CECL and your commercial lending strategies aligned so that you are able to balance expected credit loss along with expected credit profitability? If not, then now is the time, and you can pull another page from Google—because even though they are wicked smart and the cars have the latest technology, they are teaming them up first with human drivers to ensure that the more severe weather conditions don’t create noise and issues that could lead to tragic results. Likewise, if you are feeling behind, team up your portfolio managers, commercial lenders, and solution providers to at least take the first steps toward automation to optimize your portfolios.

Like the saying goes, the future is already here. The future’s just not evenly distributed. By taking advantage of these examples, you can stay in the express lane for profitable and sound growth.

Baker Hill is the expert solution for loan origination, portfolio risk and relationship management, CECL and analytics for financial institutions in the United States, and will be a Silver Sponsor and Exhibitor at RMA’s Annual Risk Management Conference, October 27–29.

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