Consumer Lending

Large banks gaining on smaller institutions in relationship-based lending

SageworksA recent whitepaper released by Sageworks indicates that larger banks may have gained an edge on smaller institutions when it comes to more personalized interaction with the customer, an area considered to be an advantage traditionally held by smaller institutions.

The paper pointed to a 2013 study by J.D. Power and Associates that showed gains by larger institutions in enhancing the customer experience and improving customer relations and said today’s consumers “are likely to find banks of all sizes offering the level of convenience, technology and personal service they have come to expect.”

The paper said, however, a deeper relationship with the customer means financial institutions must balance credit risk. The paper also said larger banks have begun to use new technology and risk management solutions to increase the likelihood of repayment.

“At a time when customers want more personalized service, financial institutions must balance credit risks with the importance of the customer relationship,” the paper said. “Doing this with business customers can be tricky, because their ability or willingness to provide financials can vary from business to business, from year to year. This contrasts with the bank’s need to perform consistently an annual review and credit risk assessment of each business customer.”

According to the paper, the key to fostering the institution’s relationship with the customer while protecting against credit risks is the use of objective credit risk measures and the development of customer and lending staff expectations that establish that “the measuring process is ongoing in the lending relationship and no longer optional.”

“Even banks and credit unions that have longstanding relationships with business borrowers can benefit from incorporating standardized, forward-looking methods for quantifying credit risk,” the paper said. “These benefits can affect customer service, financial performance and regulatory compliance.”

The paper recommended that credit risk measures include at least three major components: defining roles and responsibilities of staff, implementing standardized credit risk analysis processes and outlining credit risk metrics and thresholds.

Thomas de Roque, the founder of California-based Paragon Analysis Corp., which provides credit risk education, said establishing credit risk measures in relationship-based lending helps to build expectations.

“It solidifies relationships in that you can tell clients exactly what your standards are,” de Roque said. “The last thing you want to do is disappoint your client when they think you’re going one way, and they’re going another.”

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