To advance technology, start with your operating model

In today’s banking sector, there are three factors driving mid-market institutions to question their traditional approach: customer preferences, non-banking entrants, and automation.

Today’s customers anticipate a personalized, tech-focused experience that meets their digital expectations. Furthermore, tech-driven entrants into the banking market are disrupting traditional processes. And finally, larger banks are funneling investments into automation and other technologies to maintain a competitive edge with non-traditional lending sources.

Combined, these factors are placing unprecedented pressure on mid-market commercial banks to implement flexible technology solutions—or face the possibility of being left behind. However, in today’s environment, focusing on technology alone is not enough. To truly be competitive, a bank needs to evolve its operating model to truly harness the power of technology.

The “specialization” approach breeds a disconnected customer approach

In an attempt to advance their operational models, many mid-market banks have taken a product- focused approach—for example, having one operating environment for construction lending, another for real estate lending, and so forth. But this model is revealing limitations, ultimately leaving the customer experience fragmented and bank employees unable to leverage cross-departmental expertise.

By dividing operations into product buckets with a high degree of specificity, banks end up creating siloes that lead to a myopic view of overall customer experience. Banks leveraging this compartmentalized approach inevitably create an overtaxed back office that’s inundated with a surplus of product variations and a dearth of true value to justify those variations. Rather than bolster their competitive edge, this compartmentalized approach leaves commercial banks with significant operational and capacity planning inefficiencies created by separate sales pipelines and narrowly focused teams. Rather than creating product-oriented siloes, banks should instead focus on organizing their operations around customer need.

The key to operational change: Segmenting customers based on need

A truly customer-driven strategy should be centralized and intuitive. Instead of overseeing separate sales pipelines based on administratively imposed compartmentalization, commercial banks should instead pursue a sales spectrum based on customers’ needs. This spectrum will naturally align with products commonly sought by varying customer types and segments.

The move away from artificial divisions and toward customer need-based segmentation produces two customer categories:

Transactional/relational: These customers—which include community and business banking—are largely transactional in nature, but also require periodic banker interactions to handle complexities associated with regulatory and/or due diligence requirements. With these patrons, it’s important for banks to meet them at least twice: once at the beginning of the credit lifecycle and again toward the close. Meanwhile, dedicated teams can work to collect and process relevant financial document information, thereby eliminating the need for direct engagement to handle these routine tasks.

Exclusively relational: These customers require the bank to be a consultative partner who can help them manage their cash flow needs. These relationships involve high-value loans that have an inherent degree of complexity due to attendant collateral, covenants, etc. Commercial banks need to channel the bulk of their direct engagement toward these clients, ensuring that these patrons receive end- to-end service with highly personalized support and pricing. With purely relational clients, there must be a significant degree of communication and transparency between the customer, the credit person, and the salesperson. This high-touch model is built around a continuous team-based approach that offers the highest level of customization for the borrower.

What a new operating model means for customers

Commercial banks need an operating model that creates a seamless customer experience across lines of business. A product-focused approach to segmentation doesn’t provide this. Because of its highly specific nature, a product-oriented strategy ends up creating customer experience siloes that prevent commercial lenders from creating a uniformly convenient and satisfying user experience.

By contrast, the segmented approach we’ve outlined above is inherently customer-centric. Rather than dividing customers according to artificial categories, the segmented approach breaks down customers in the way that most directly serves their needs: low-touch customers looking to get prompt loan approval will value the expedience of a purely transactional relationship, while patrons seeking more complex services will appreciate the end-to-end service of an exclusively relational partnership.

What a new operating model means for bank employees’ roles and skillsets

In addition to redefining the customer experience, a needs-based approach to segmentation will also have a transformative impact on people, processes, and skillsets within a mid-market commercial lender. 

Here are some key changes commercial banks can anticipate:

Business and community banking lenders shifting into service roles: Lenders who have typically operated in community banking or business banking roles will shift into concierge-dominant roles to accommodate the new framework. As a result, these transactional/relational lenders will interface significantly less with transactional borrowers, and no incentive or sales credit will be provided for their deals. These lenders will manage a higher portfolio load and will invest more time in acquiring new customers. From a training perspective, these lenders will have less responsibility for deep credit skills, but will need more digital and technological aptitude to assist customers with self-service options.

Early partnerships between commercial lenders and credit teammates: Under the new operating model, commercial banking lenders will operate in an exclusively relational framework. In practice, this means that in addition to their existing duty of providing high-touch relational service, they’ll also need to partner with a credit teammate early in the sales cycle. Customers benefit from this opportunity to engage with “credit” individuals during the underwriting process.

But for commercial lenders, this change requires a mindset shift. From a skillset perspective, lenders will need to surrender their complete ownership of a relationship and allow other teammates to interact with their customers for certain administrative activities, such as collecting financial statements. This will enable lenders to focus on analyzing their clients’ needs and developing solutions that they can present to them as a value-add partner. From a relationship perspective, lenders with a deep background on the customer relationship will continue to be the main point of contact.

Prominent, customer-facing role of credit administration: Credit teammates may end up taking on a more customer-facing role in order to improve customer transparency into the credit cycle position and reduce the overall credit lifecycle process. But the need for credit admins to become more central may pose a challenge for credit professionals, many of whom have never served in a customer-facing capacity.

As a result, they may require additional training to ensure they evaluate customers not just from a credit risk perspective, but through a relational lens as well. These changes are not easy and will likely require significant re- skilling for some credit resources.

Operational preparations must come with change management efforts

In addition to people and skills-based changes, a client- centric model will require commercial lenders to make certain internal preparations as well. This preparation begins with effective integration of change management efforts. To facilitate the push toward a more customer- centric operations model, commercial banks should take stock of their internal change management functions to ensure they have the executive sponsorship, effective governance, and streamlined internal communications to enable an operational shift. In addition, banks may need to assess gaps in skill sets. New roles will need to be defined. What is more, a thoughtful approach to aligning current talent to newly defined roles takes time. Roles must be clearly articulated with clear measurements in place to define success.

In terms of other process changes, the introduction of a new operating model will also result in higher client loads in a consolidated back office that will be able to manage loan operations flow, from either the transactional/ relational or exclusively relational roles. Standardized fees and exceptions will also apply to the transactional/ relational customer, eliminating the need for multiple fee waiver and exception processes. For exclusively relational customers, clear ownership of due diligence tasks—what falls on attorneys versus internal banks—must be clearly defined. And for both customer groups—transactional/ relational and exclusively relational—there must be dedicated operations resources that accelerate client contact and drive faster processing times. 

What about technology?

Commercial banks face a future increasingly defined by competition—both within the industry and from outside technology. Keeping pace with this evolving climate requires evaluating outmoded operating models and correcting longstanding internal inefficiencies. This change demands less complexity and more automation. That’s where technology enters the picture.

By introducing a new and flexible loan origination system (LOS) platform, lenders can significantly automate the entire credit process lending workflow. A robust LOS platform can substantially augment a customer-based operating model by providing key benefits that include improved workflow capabilities; straight-through process credit origination; streamlined portfolio management/ covenant management capabilities; enhanced reporting and analytics without significant data manipulation; and simplified data entry for operations resources. As an additional consideration, banks hoping to move the needle on efficiency and improved automation can consider robotic process automation (RPA) as a natural extension of the loan boarding process.

Before a bank embarks on a costly and time-consuming systems change, they should first address their outdated operating model. It is very difficult to demonstrate the value of new software on a per-loan basis. However, an optimized model simplifies calculating an ROI that cannot be ignored. 

This new commercial lending model generates high-level benefits

Commercial lenders that adopt a well-defined and streamlined operating model supported by a robust and flexible LOS application can expect a host of high- level benefits. These benefits begin with an improved customer experience due to shorter approval cycle times and improved digital offerings. Additionally, lenders will be able to oversee more efficient deal teams and sales processes, which will also help streamline the customer experience.

On the sales side, shorter cycle times will also help speed up the pipeline, which will allow for more potential business opportunities to be qualified. This streamlined approach also has significant operational benefits for banks, enabling them to eliminate a multiplicity of artificial segments going to different credit lifecycle paths. Instead, operations resources will be trained and centralized according to directly customer-centric segments.

A new operating model will also enable lenders to bring clarity and consolidation to the back office. Whereas commercial banks have historically relied on multiple back offices to support artificial segmentation, this multiplicity has created internal siloes that functionally impede streamlined processes. By contrast, a genuinely streamlined operating model will include a shared back office that satisfies all lending channels. Under the new operating model, the back office will function through an efficiency lens, providing standardization across loan documentation, fees, and client engagement.

Reputationally, a streamlined operating model will also enable commercial lenders to boost their brand presence by showcasing improved digital offerings and capabilities. Demonstrating these resources will enable commercial lenders to move “up market” and allow them to gain a competitive edge.

Conclusion

Commercial banks today—particularly middle-market and regional operations rooted in more traditional methods—face significant pressure to adopt new technology to keep up with evolving consumer preferences. Without adopting a more customer-centric approach, traditional banks will lose customers to peer organizations that are willing to undertake the change.

Given the state of commercial lending, banks can’t afford to delay these changes. Today, mid-market commercial banks aren’t only competing with peer organizations and larger banks, they’re also facing the widespread emergence of tech-driven alternative lenders.

While commercial banks may be tempted to channel all their energy and resources into adopting new technologies, that strategy is often premature, rendering the technology incapable of living up to its promise. Instead, banks should begin with their operating model, refining a strategy built around streamlined customer relationship management, consolidated back office functionality, and organizational readiness to change.

It is our opinion that middle-market banks must confront their operating models to maintain a competitive advantage in their markets and reveal the promise of emerging, flexible technologies.