The commercial lending - traditional C&I, CRE and other - segment is one of the last areas to be “automated” or captured within an automated lending platform. Many of us talk about the need to automate this segment but the discussion needs to start with the question of “What does it mean to automate originations in the commercial segment? Let’s start to break this down and define it.
Previously, we have covered how to define small business for your respective financial institution. If you use that as a measurement of what is small business, the remaining segment would by default be your commercial segment. It seems obvious but good to re-iterate to keep the context on commercial.
What we are not planning to cover is the small business segment where there is relatively high application volume and low total dollar production. If we compare small business and commercial across two major characteristics, we the distinction becomes more clear.
The above chart represents the typical situation – the probable not the possible scenario. For example, there are situations where the sales lead time is days not months for a commercial lending opportunity or a small business application can sometimes take over a year to get the application.
I like analogies so let’s compare mass produced furniture vs. custom furniture to small business vs. commercial. Mass produced furniture is high volume but low dollar per unit (small business) while the custom furniture is the low volume but high dollar per unit production (commercial).
Basically, the furniture being mass produced has a low need for any customization with high demand and a low cost of production on a per unit basis. Conversely, the custom furniture production has relatively low volume but a higher cost of production on a per unit basis.
We can agree that at a high level both would have the following process:
Now let’s look compare the processes between small business origination to commercial origination:
The custom furniture maker has no set designs, no set product line but rather examples of past work that has been done. There are no set materials that are to be used and no set prescribed method for manufacturing any particular item. While one customer may want a dining room table that has leaves to expand the seating as needed, another may want a drop-leaf table or simply a static table top. It is up to the customer to decide what the criteria is to best suit the need. The talented furniture maker will provide his/her expertise to provide the best product/solution for the customer but the end result is ultimately up to the customer. Such a design will be worked and potentially reworked multiple times before the right design in actually approved by the customer. Once the design is approved, the work begins on creating the piece of furniture. The creation may follow a standard set of procedures or may not. The key is that there is no set way that must be followed in the creation. The furniture maker will not wait until all material is available but rather can start on portions of the furniture (turning the legs, rough cutting the wood for the table top). While there is likely an agreed upon delivery date, the success is dependent upon completing the furniture by that date, not following a set prescribed path to completion.
It is possible to design and capture the small business origination process with its defined roles and responsibilities in a detailed process map. The small business origination process can measure and monitor service level agreements and set expectations with the client around the entire process before the application is even taken. Prescribed order and dependency around the activity and/or task-level process mapping can be accomplished in the small business origination process with a high degree of accuracy and consistency from one application to the next.
The commercial loan origination process, however, cannot be captured with a high degree of accuracy and/or consistency. Individual efforts can certainly be captured and specific service level agreements can be established. For example, the spreading of financial statements can follow a prescribed methodology and service level agreements can be established. However, attempts to establish service level agreements that when combined could adequately set expectations of total turnaround times, estimated completion times and prescribed methodologies would result in much lower compliance with such prescribed processes rendering it meaningless.
Joel Pruis is a senior business consultant with Experian's Global Consulting Practice. To learn more about strategy consulting and access more thought-leadership from our team, please visit www.experian.com/consultingservices.