Increasingly challenging economic conditions mean banks and lenders must be smarter about their commercial lending decisions. Here we ask Ian Nelson, Managing Director of EMEA at Q2, and Travis Wilson, Senior Regional Sales Manager at Q2, to share their outlook on the market and how commercial lenders can secure growth.
What’s your outlook for commercial lending in 2023?
TW: Commercial lending is going to focus more on profitable areas of the markets, meaning financial institutions need to identify the sectors they want to target and concentrate on them. Certainly, banks are going to be looking at the lending book and being more careful about where they deploy capital, particularly from a risk adjusted view and being more cautious in sectors and industries than are currently struggling, such as hospitality, but they must also recognise that these sectors will change over time and there are opportunities to be had. This is why it’s so important for banks to be able to make agile decisions on good real-time data.
IN: We’re going through a period of high inflation and escalating costs, and that undoubtedly going to feed into clients’ ability to pay. Travis is right in terms of the front-end, looking at where banks invest in terms of commercial lending, but I think they’ll also be looking at how they managed the back end. How are they going to manage clients who are finding it more difficult to pay the bills? However, I do think banks will still be looking to increase lending in the space and that we’ll not necessarily see the contraction that some expect in business written. I do think those two variables will play a prevalent role in how they deliver growth.
Can you outline some key areas for consideration to manage these concerns?
IN: Lenders should invest in technology that allows them to mitigate these risks and improve efficiencies. There’s a lot of technology out there that can help them to do that. Q2 comes across a lot of banks that are technologically enabled on the client-facing side, but in the background, they are struggling to keep up. I still think there are a lot of legacy systems, manual systems, and fragmented architectures in the background of organisations that could and should be sorted out.
Explain how pricing and risk management can help early in the cycle?
TW: Periods of high inflation or high-interest rates are typically profitable for banks. Pricing is probably going to be less competitive. Banks are going to have slightly higher margins. But, once again, pricing and risk management probably link to the point that I raised earlier around banks and lenders being cautious and thinking about where to deploy capital into the economy, taking a risk-based approach to the process. Certain sectors are going to be more heavily affected than others by the threat of recession. But, as Ian mentioned, banks are still going to be lending money. There is still going to be capital to deploy into the economy. How banks price those loans and structure those loans probably need to be thought about a little deeper given the kind of wider strains in the economy.
IN: Lenders should be thinking about agility in their use of capital. In a market that is changing, and that’s facing many pressure points, it’s important to stay flexible. Pressure points in a sector may change over time. It may be that a lender avoids one sector and promotes another then reverses that thinking over time. Being agile is key, and something that we don’t see an awful lot of.
Should businesses focus on automation and operation efficiency?
TW: Automation and efficiency are incredibly important, particularly in competitive environments. Bringing clients closer to the bank has always been a focus and should be now more than ever. A lot of banks have addressed automation and agility in the lower end of the book but have neglected the higher end of the book, often in the commercial space. We’re seeing a lot of that coming into focus now. We’re helping a lot of banks here, whether that’s loan origination, pricing, or deal structuring. There are lots of areas of opportunity for automation and for increasing efficiency in those spaces.
IN: Banks are much more willing now to use automation and technology to bring efficiencies. In the past, the focus was mainly on the consumer space but, quite rightly, it’s now coming to other parts of the bank. My only caveat on that is that— as a technology company — we’re not saying that technology is needed for every single part of a lending operation, or every sector, but there’s a wide spectrum of areas that would benefit from efficiencies, particularly in the current market conditions.
How else does technology fit in?
TW: Implementing technology in the banking or lending space is not about replacing human interaction but making humans more efficient. As Ian says, technology doesn’t need to be part of the process, but it does play an important role. For example, the Q2 lending platform is configurable to the way that a bank or lender wants to use it, whether that’s straight-through processing in a highly automated fashion or making the process very hands-on. My point is that banks and lenders need to understand their flow, and processes, and be able to adapt.
IN: Data is the other part of the equation. Consolidation of data; the bringing in of data at the right point of time for lenders and bankers to be able to make clear and concise decisions; the ability to report across all of their portfolios; the ability to bring all that data to front-of-house rather than reporting on it weeks later; having data at the point of sale; data AI, and when and how we use that information; those are the areas where technology really improves conversations for bankers and lenders.
Any concluding message considering everything we’ve discussed?
TW: The best thing for banks and lenders to do now is review their processes and technology and tackle areas that have high operational inefficiencies and high operational risk. Those processes we often take for granted, but they are also areas that we can solve quite easily by utilising technology.
IN: Q2 does see the market as buoyant. Certainly, we have some difficulties coming along the track, but technology can help with many of the issues banks and lenders are facing, with many efficiencies to be gained. We can help facilitate capital utilisation as well as generally assist with the management of clients through a difficult period.
To find out how Q2’s technology can help your operation, download the whitepaper on this page.
