How banks are using technology to monitor the health of small businesses

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As banks shift their focus from the paycheck protection program back to regular small business lending, they are grappling with one problem: how to closely monitor a customer’s financial health during the ongoing coronavirus pandemic.

The data banks traditionally rely on to check the health of small businesses, such as annual financial statements and tax returns, are less reliable in the age of COVID-19 as they can be months old and quickly become stale with rapidly changing business conditions.

However, some banks are using technology to analyze alternative sources of data and develop new methods of assessing the health of small businesses, especially given the influx of new customers. This could include the use of scores that examine how geography, industry, and other characteristics affect the likelihood of a small business failure, ratings that look at individual companies rather than industries as a whole, and software that analyzes a loan portfolio for signs of emergency .

“Many traditional sources of financial auditing do not consider what has happened in the past three to six months,” said Desiree Wolfe, director of product management for community banking at Webster Financial in Waterbury, Conn.

Desiree Wolfe, Director of Product Management for Community Banking at Webster Financial, is leveraging partnerships with data company Deluxe and others to assess the impact of COVID-19 on the bank’s small business customers.

The ability to analyze a business customer’s health has become more urgent as many banks have suddenly taken over large numbers of unknown customers through the PPP.

Garry Capers, head of cloud solutions at Deluxe Corporation, a Shoreview, Minnesota company that aggregates real-time data on small businesses for its banking customers, noted that the PPP has made small business more willing to look for new banking relationships. As a result, he says, some banks have acquired customers they would not have targeted through normal procedures and must now decide whether to continue the relationship or end by repaying the PPP loan.

“A number of our bank clients are asking how they should think about these new relationships, identify potentially profitable and sustainable relationships, and find ways to grow the relationship,” said Capers. For companies that are not sustainable, in his opinion, the question arises: “How do we manage this emerging risk in our portfolio?”

The subset of brand new relationships that emerged from PPP is relatively small, but it still poses a problem for banks as they need to find new ways to monitor these customers. A JD Power small business banking study in October found that small businesses that applied for and declined a PPP loan from their main bank were 17% higher than those who were approved.

Numerated, a digital credit and sales platform for commercial banking, estimates that a fifth of their banks were aggressively seeking new relationships from the paycheck protection program.

In addition to reviewing new customers, banks also needed to review the health of their existing small businesses, determine which customers are surviving the pandemic, and proactively mitigate risk to their portfolios by offering payment plans, refinancing loans, or discussing other needs.

Ken So, founder and CEO of Flowcast, a machine learning platform that helps financial institutions make lending decisions, has seen banks rely less on traditional tax return data and more on alternative sources of data, including transactions and bank account activity, to provide real-time Information on the company’s health during the pandemic. Kabbage, OnDeck, and other fintech lenders follow the same formula.

If a bank sees that a customer is about to default, it can be more proactive in offering refinancing or a rate-linked loan to mitigate the risk, said So, whose company has developed a model that predicts these incidents.

Flowcast works with three major banks and more than a dozen medium-sized financial institutions and non-bank lenders.

Capers sees the importance of real-time data similarly.

“The concern is that the legacy data used to target prospects and conduct portfolio risk management is not current, comprehensive, or dynamic to adequately reflect the impact of COVID-19 on the health and survivability of small businesses,” he said .

Deluxe aggregates real-time small business data for its banking customers in a number of ways. For example, it analyzes the health and growth path of the 4.5 million small businesses that use deluxe products like website hosting, e-commerce tools, and payroll services to see if the company is hiring, ordering, or seeing more promotional items an increase in e-commerce transactions. Deluxe also layers information from several third party data providers.

In March, Deluxe launched a COVID index to determine which companies are at higher or lower risk of default based on their geographic, industry and financial characteristics. It uses this data to help banks determine which companies are at higher risk of default and to tailor marketing campaigns such as:

Wolfe of Webster used data from Deluxe and other partners to assess the impact of COVID-19-related economic pressures on its small businesses and their ability to hold their own in the pandemic. Client advisors use this information as part of regular health reviews when they proactively reach out to our business clients to review their current financial information, discuss upcoming or potential needs, and make recommendations.

Starting in the third quarter, the $ 33 billion asset Webster resumed its regular customer care and marketing efforts outside of PPP loans. “We are using partnerships like Deluxe to add additional filters when assessing the company’s ability to sustain itself during COVID-19,” said Wolfe. “We also use them to manage our portfolios and acquire new relationships.”

To help its customers adapt and survive, Webster has worked with customers to provide cash flow management services such as the ability to take card payments at the curb or in-store through Webster Merchant Services, or to handle payroll through Webster’s payroll tools .

Dan O’Malley, CEO of Boston-based Numerated, says banks are less reliant on a particular debt service coverage ratio based on historical financial information when deciding whether to make new loans. Instead, they mark businesses like restaurants that have been hardest hit by the pandemic for more in-depth review and put more emphasis on a company’s ability to return a loan based on cash flow for the past three months rather than on previous year’s tax.

Customer Bancorp, in Phoenixville, Pennsylvania, first in partnership with UK fintech OakNorth in April, which allows the company to individually review every loan it has made to small and medium-sized borrowers. This review process takes place annually and includes the assessment of the company’s financial strength and the preparation of forward-looking forecasts.

OakNorth’s “COVID Vulnerability Assessment” identifies which companies could withstand a six-week, three-month, or six-month shutdown. The platform also provides a company-wide overview of credit quality and industry exposure.

The $ 17.9 billion net worth clients also looked at each asset class under management and considered the length of time it would take each company to survive the effects of the pandemic. As a result, customers could take proactive action, e.g. immediately.

This automated credit-for-credit verification “It has allowed us to be much more agile and manage risk much better,” said Sam Sidhu, Vice Chairman and Chief Operating Officer of Customers.

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