September 19, 2019

The Digital Divide in Business Lending

The rise of the Digital Age has caused tremendous disruption in many industries, including lending. Advancements in digital technologies include cloud computing that allows remote access for teams, sophisticated websites and loan management systems that create opportunities for online loan applications, and mobile apps that let customers manage their accounts and make loan payments anywhere in the world. However, many traditional lenders are falling short in adopting these technologies and are losing out on valuable business in the process.

Lending is a competitive industry. And in an era of growing choice, lenders need every advantage in order to stay competitive. Yet very few are taking business loan applications online or adopting any other increasingly popular digital practices. So far, alternative lenders have been the firms taking the lead in adopting technologies that allow for an online driven loan process. Traditional lenders focus on relationship banking, which relies on in-person interactions. As online technologies, and the 24-7 access they offer, have become increasingly popular, demand for services at brick and mortar financial institutions are declining, leaving many to reduce hours, close branches, and even switch to a primarily online platform.

As these changes occur, many experts are claiming that those who recognize this trend as inevitable and start investing in online technologies and online lending are the ones who will survive and thrive in the future. Those who don’t, may find themselves obsolete, or at the very least, struggling to remain competitive.

Of course, online lending and banking is a double edge sword. While online portals and applications improve access and convenience for borrowers, they increase access for thieves too. Cybersecurity already costs the financial services industry millions of dollars a year. In fact, financial services are hit harder by cyber-attacks than any other industry. The increasing cost of digital practices, coupled with the increasing demand for digital services, is creating a unique mix of market pressures for financial institutions.

There is no doubt that digital lending is on the rise and that cyberthreats are increasing too. Lenders need to be proactive and look for opportunities to mitigate cyber risk while minimizing costs. To date, technology has been a hinderance, but the increase in demand is also encouraging new technology partners to enter the field. These new partners are actively improving enterprise loan management systems and customer portals. Still many lenders have tried to dive into the technology space on their own and are developing their own proprietary
solutions. There are many advantages to using an outside service for technology instead of creating an in-house solution.

First of all, technology changes at a rapid pace. It’s difficult to stay relevant and current with the necessary skills and tools needed to develop up-to-date solutions. Second, it is cost-prohibitive to take the proprietary development route. The enterprise level software solutions developers are creating are developed and financed using a utility type business model, in which the cost for developing a system and keeping it current is divided among many customers. The tradeoff for a lower cost solution is less customization, which is something lenders may need to consider in order to stay current in today’s technological landscape.

Bottom line, the change is happening, and online lending tools are quickly becoming a necessity. Lenders need to acknowledge the forces at work and look for solutions that will allow them to leverage technology while ensuring their fiduciary responsibilities to their customers. As more lenders participate in the development and adoption of technology, more improved solutions will enter the market, creating more opportunity for lenders of every size and better access to borrowers.

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About Chuck Evans, CEO

Chuck has 30 years in commercial banking and economic development lending. Prior to joining Capital Growth Solutions, he was President, CEO and Co-Founder of PrudentLenders, LLC. after having previously served as Managing Director for Pennsylvania’s largest Certified Development Company: South Eastern Economic Development Company. Chuck has been an active supporter of small business and an active participant in the industry associations, National Association of Certified Development Companies (“NADCO”) and National Association of Government Guaranteed Lenders (“NAGGL”).

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