Banking on Digital Growth
Banking on Digital Growth

Episode · 1 year ago

102) #ExponentialInsights - The 3 Biggest Opportunities in Small Business Lending


Small business banking is 20% of global banking revenue, which means if you are a bank or credit union…

You can’t afford not to do it.

When you want to figure out the best SMB lending model, you turn to today’s guest, Gord Baizley, CEO at JUDI.AI.

He joins the show to discuss:

- The 5 biggest opportunities in small business lending

- The culture required to thrive in small business lending

- The importance of benchmarking and being able to iterate quickly

You can find this interview and many more by subscribing to Banking on Digital Growth on Apple Podcasts, on Spotify, or here.

Listening on a desktop & can’t see the links? Just search for Banking on Digital Growth in your favorite podcast player.

Small business banking is according to McKinsey, of global banking revenues, like it's a massive category and I mentioned before, my belief is it's an anchor to a whole bunch of other dimensions of the relationship. So you can probably counted as 30% of global banking revenues when you attach the peripheral opportunities to it. Like I don't think a bank or credit union or an institution can afford not to do it, No. Mhm. Mhm. You're listening to banking on digital growth. With James Robert lay a podcast that empowers financial brand marketing, sales and leadership teams to maximize their digital growth potential by generating 10 times more loans and deposits. Today's episode is part of the exponential insight series where James robert interviews the industry's top marketing sales and fintech leaders, sharing practical wisdom to exponentially elevate you and your team. Let's get into the show greetings and hello, I am James robert, ley and welcome to the 102nd episode of the Banking on digital Growth podcast. Today's episode is part of the exponential insight series and I'm excited to welcome Gord basically to the show, Gordon is the Ceo at judy dot Ai and they are helping small business lenders make the most of economics of small business work through A. I. And automation with underwriting monitoring and portfolio reporting. Now I'm excited to talk with Gord about the work he and his team are doing at judy Ai because we are continuing to see a tremendous growth opportunity for financial brands to maximize their own digital growth with a focus on the SMB market. And with that welcome to the show, Gord, thanks very much for having me, excited to be here. And looking forward to a great conversation about small business lending. Absolutely. And speaking about exciting what is one thing that you are excited about right now, just personally or professionally your pick? I would say, I'm excited about something that blends into both, which is the world is coming back to life. And uh, obviously we're all able to start to live a live a little and then hopefully get Covid behind us. We're a little behind you here in Canada. But we're getting there and professionally, obviously that's really an exciting time to, we found, you know, when Covid first sort of on set itself on us, things slow down for a quarter or two. But it's since that time and really, I think disrupting the way institutions think and driving digitization and innovation and hopefully, uh, there'll be some, I guess, some good to come with us on the other side of it. So looking forward to seeing what that looks like. Yeah, that's been a repeated pattern and trend that we're hearing from others. And you mentioned that you get out to go play golf recently with a client and they're just overwhelmed right now with a lot of opportunity, right. Yeah. Absolutely. I mean there uh I think all of the uh certainly mid sized financial institutions are frantically trying to digitize you know and get for some of that. Some of that was happening anyway. They were saying you know their I. T. Team as the words they use but it's under siege in a positive way. But there's just so much demand on them for projects and getting a project prioritized as a real uh real art. So yeah and that comes down to just wanting to capture all the opportunity. And as I've mentioned, I see opportunity with the SMB market. This has been a one of my top 12 trends for digital growth in 2021. I referenced back in episode # 55. Ron Shevlin also touched on that in episode 58. I'm excited about the work that Corey Leblanc and his team are doing, which he referenced an episode 73 the S and B market and then just had Derek Sutton on an episode 94. So that's some context for the dear listener that this is this is something that keeps coming up time and time again. But Gordon, I want to hear from you right now. Why do you feel that the Smb market is primed...

...for financial brands as a way to maximize their own future digital growth potential. Yeah, I mean, there are a few reasons, you know, first of all, just a massive segment, right? So depending on the data you look at, but it employs the majority of americans, the majority of businesses or small businesses. So it's a huge opportunity, but it's one that's kind of been lost because it's hard to service. So it's been either buried in the retail divisions of the large banks and not service properly as a result. Or it's been stuck into the commercial processes of banks and credit unions, which in particular with respect to lending a large dollar commercial process, doesn't work for small business lending. And so, so there's this massive market that's been untapped and I think there's an opportunity to blend relationship banking with technology and data and come up with the best of all worlds against the service stock market. So that's what we're trying to do here before we get into deeper some of those opportunities, I want to start with the pain points. What are those pain points? Those friction points that you are seeing through the conversations that you're having with financial brands. When it comes to connecting with those small to midsize businesses? What's hurting them right now? Yeah, I mean, most of the financial branches find it hard to service that segment. The economics are challenging, right? So that you got small dollar loans and I refer to small business as our small business lending as uh, the worst of all worlds in the middle. So on the left, you've got consumer lending, right? Credit score driven, pretty straightforward. And then you've got large cellar commercial lending on the right, which is, uh, you can spend some time on it. The economics work to do that, but you can't treat in the middle a $50,000 loan or even a $500,000 loan like $50 million loan. And, and that's the challenge and damage to the space. So you've got a little hit rate on credit for us, for the business itself, You've got financial statements that are hard to get. You know, we had a prospect the other day talk about a game of ping pong have with these types of businesses where it's back and forth, back and forth and the information and then it's not reliable when you get it. And then the analysis, you can't spend a bunch of time on the analysis. So all of that adds up to economics that don't work. And if the economics don't work, then the customer experience isn't gonna work either. You talked about this being a growing market and we're seeing that. I'm curious to get your thoughts for the dear listener because this is an untapped opportunity here. Where and how does the growing gig economy play into this conversation? Because you're right up to this point historically, I would say the gig economy has gotten hidden or has been hidden in the consumer side of things. It's now time to pull that out and give it its own space to play in. It is and it's small businesses hard and the gig economy creates an added dimension to that complexity. Is the business for self or whatever you want to call it. And you've got now people and businesses that look the same, but they're neither. So you need to find a way to untangle that and untangle it efficiently and hopefully draw in some of the efficiency that is in consumer lending and apply that to small business slash gig economy lending while not losing the rigor of commercial lending so that you don't lose your shirt. And you need to come data to do that. And that's where the opportunity is, because you've you've touched on this a couple times now, you mentioned the efficiency and and there's a great infographic that you have on your website that shows the traditional S. And b. Lending journey being, you know, 1-4 weeks. But you're talking about taking that from down to just mere minutes now. My question is going deeper. What are some of those more specific opportunities that financial brands have to really innovate the sMB lending model here? Yeah. I think there's really three opportunities. Right? What is your speed? So can you speed up the process and get to a faster decision? And that's that's the efficiency play right? If you can do things faster with less resources, you get a better result...

...quicker. The second one is managing risk. And ultimately if you're managing risk Better you can reduce the loss rates but more importantly you can expand the credit box and so if you can provide more credit to small businesses, that's a big win on any given survey, you look at 50% of small businesses complained that lack of capital is the largest problem, right? So you can use attack to solve that problem. And then if you get speed and if you get an expanded credit box, you've got a way better customer experience. So that's a massive win for obviously the small business, but also the institution in terms of retaining the client. And our view is that small business and banking and small business lending is actually a pretty strategic part of the relationship. And if you have that, you probably get the consumer side and the mortgages and wealth management. So we have a few clients that definitely look at it that way. And you know, rather than looking at it just as another part of the retail business. So there's the trifecta of speed, reducing speed, risk improving the risk model, particularly for the business owner, because that pain point is access to capital. And then when you add those two together, it's an optimized experience that makes people feel good and you can tap deeper into the business wallet. But then also you've got a whole opportunity of of employees who work at said business because that that that employer becomes the advocate for the financial brand. It can really I mean, it's it's a win win win win for the the small business and the small business owner, a win for the financial brand and even a win for the employees of the small business. When you add all of these different components together, where might because you've you've touched on technology and data a couple of times out to where might there be an opportunity for a financial brand to transform their model to move from really being reactive, waiting for an S and B to raise their hand and say I need help to taking more of a proactive stance in that S MBS life if you will to provide recommendations to provide advice. And dare I even say, to provide maybe some even coaching and advisory services based upon the data that they're seeing from that S and B. What what does that look like here? Yeah, absolutely. And that's certainly where all of this is going, where our platform is going. You know, we've started with looking at everything through the risk plans. Right? So all the data we ingest, we're looking to assess risk, but you quickly transfer from Okay, this is a risk assessment in reaction to an application to let's do a risk assessment as part of a three approval process or across all or Upsell process. But then you're into, okay, forget about risk for sex. What else is in the data? What else can you track them there, you know, sitting on too much passion, you better call the wealth management team or they've got a bank account Dora or alone with another institution or these guys could use some insurance or so when you're looking at the data and our clients are quickly pushing up there saying, well 50 if you're looking to sitting on all this data and you've got the talent and the tech to look at it, please bring us the growth opportunities as well. So and that's where I see more of the proactive coaching advisory. Next best product. I mean we're seeing that already in the Quickbooks world. We're seeing that in the MX world. I mean I get offers based upon all the data that they have on me and could get access to capital literally within five minutes if I needed it. But it's interesting to to see what's going on on. Like for example, the payroll side, like with Gusto and how gusto is bringing financial services. So there's a tremendous opportunity. My question when it comes to innovation and transforming not only the model, but transforming the mindset, what are some of the challenges that you're seeing holding financial brands back from optimizing and innovating on this smb...

...lending experience and really just I would say the overall relationship as a whole, what's keeping them from making progress here? Yeah, a couple of things. The first one we already touched on, but just resources, you know, and there's so much digital transformation to be done and so many digital projects underway that getting this particular dimension prioritise is always a challenge. And so they've got to fight that. I guess the second one would be would be just cultural. So, you know, we're selling in particular into community banks and credit unions in and you know, they're very protective of their positions as relationship lenders and stewards of the relationship, which as they should be, that's their that's their competitive advantage. But they don't have to think of this as mutually exclusive technology and data can unlock time for the relationship and for higher value activities. And so it's not that you're automating customer service into oblivion, it's it's quite the opposite actually. It's going to it's going to raise the bar and give you more time for that relationship. Technology has transformed our world and digital has changed the way consumers shop for and buy financial services forever. Now, consumers make purchase decisions long before they walk into a branch, If they walk into a branch at all, but your financial brand still wants to grow loans and deposits, we get it. Digital growth can feel confusing, frustrating and overwhelming for any financial brand, marketing and sales leader, but it doesn't have to because James robert wrote the book that guides you every step of the way along your digital growth journey, visit www dot digital growth dot com to get a preview of his best selling book banking on digital growth Or order a copy right now for you and your team from Amazon inside you'll find a strategic marketing manifesto that was written to transform financial brands and it is packed full of practical and proven insights. You can start using today to confidently generate 10 times more loans and deposits. Now back to the show what's using automation and ai artificial intelligence has not a replacement but an augmentation to the internal talent to the internal resource that can then provide better recommendations that proactive coaching guidance advisory model for. But let's dig deep into that that idea of culture of the mind set. Where's the gap? And what do you feel could be done to begin to bridge that gap to say, hey, we're not trying to replace anyone. We're just trying to make you even better so that you can do even more for your clients. A lot of the culture obviously starts with leadership saying, look, this is a priority and we're going to drive this right? And I've talked to, I remember distinctly being in a meeting recently with a credit union and it was in a C suite executive talking to us about, I know that my competition is in the bank down the street or the crediting down the street. it's going to be amazon or facebook for all of the platform guys that are getting into small business lending and then banking. And so that mindset had them running fast at, okay, where what are the ways that we can iterated and digitize quickly and not just taking on massive digital transformation projects, but actually finds equipment. And I think that's a key mindset in terms of the culture, is getting iterate quickly and not just look for a platform that's going to solve everything all at once. You know, you talk about this idea of quick wins. We were we were discussing being able to get set up and running and Eight weeks vs you know, 2-3 years. And by that time it's it's too long. Let's talk about cash flow data because you wrote about this being an old piece of jewelry with a new battery, the new battery being machine learning and how that can help address some of the S. And P. Credit conundrums that are really a big sticking point. So where does cash flow data play into the mix here from being able to help make some of these proactive recommendations and...

...decisions? Yeah. I mean it's a critical piece of the puzzle. It's what allows us to not have to pour over financial statements and do a bunch of manual analysis. And and like we wrote about 10 years ago you couldn't look at this because it would have been manual processes. Now with some of the machine learning technologies available. We can untangle that. A bank statements, a bowl of spaghetti. It's cryptic and it's pages and pages and months and months of data. You can look at. You know if you have 12 months of data to look at and 55 pages per month you got 60 pages of very cryptic transactions. But imagine now if you could quickly turn that into a synthetic income statement and then quickly extract proxies for ratios out of that. Well you can automate the lending process almost in seconds as a result. And then from there to your point you're also looking at saying, okay where's the growth and the golden there too. So so the whole idea of looking at cash flow data has really transformed lending. And it started with the Fintech lenders, you know, several years ago and now. And that's where we were born and incubated within one of those. And so the idea of using that sort of alternative data which is debatable has been around a long time but it's key. It's definitely critical to transformation that's underway. You mentioned being spun out of of, of Fintech. I have to ask you when it comes to sMB lending, what is a common belief that others in this industry might have that you just passionately disagree with. Yeah, I would say, you know, there would be lenders out there, whether it's commercial lenders or retailers that don't think you can, you can have run an SMB portfolio profitably and efficiently and then it's worth the trouble. And I would passionately disagree that you actually can do that. Not only you can, but you need to, its small business banking is according to Mckinsey, 20% of global banking revenues, like it's a massive category and I mentioned before my belief is it's an anchor to a whole bunch of other dimensions of the relationship. So you can probably counted as 30% of global banking revenues when you attach the peripheral opportunities to it. Like I don't think a bank or credit union or an institution can afford not to do it. And getting really practical, let's let's take one of the financial brands that you've been able to work with and optimize this experience and you don't have to name names here. But what did they come to you with? They came to you with a problem. What was that problem that they address? And you were like, we can definitely solve that problem for you. What did their past look like before working with you guys? Yeah. So I can think of 11 client particular crediting and that came to us and they felt that they weren't properly servicing their members in this respect. And then it was a massive opportunity. And the way credit you think it's not just an opportunity, but it's actually something they have to do. Like this is a service we need to provide to our members. And, and so we've got to make it more efficient and we've got to be able to lend the small dollar amounts without taking weeks and months and, you know, ruining the economics and routing the customer member experience. And so this was actually our first client essentially. That was arm's length when we respond out of our, of the Fintech. And so this is exactly what we were doing inside the Fintech. And we had the benefit of having gone through all the trial and error, I guess, and the growing pains as a lender ourselves before spinning out and reselling the platform. And so how important thinking about this is doing some type of benchmarking. It might even be competitive benchmarking against others because coming back to the point about culture, about leadership, what I find is the big thing that holds people back is just the lack of knowledge a of what is possible or be it's the fear of the unknown. And so by doing some type of benchmarking study, i. E. Let's just call it digital secret shopping. I'm curious how many S. And B. Lenders have ever done that comparative to say like...

...a cabbage or any of these other Neil lenders in the marketplace, who literally are making the claim that you know, you can get access to capital and cash sometimes in minutes and that's a very attractive offer for a small business owner like myself, knowing that there's a lot more on the other side of that equation, just because of my knowledge of the industry, but from the average smb owner. So where does that fall in of just helping build some awareness for just the general marketplace that they might not know that they have a problem. Yeah, I mean, and obviously we try and relay our experiences to people and communicate the edge that these lenders have to write aside from the customer service and customer experience angle that I think is critical and small business lending to small businesses want to have a relationship. But aside from that, the alternative lenders that you just mentioned, they have pretty high cost of capital. So the economic model is radically different. That's where we keep coming back to community banks, credit unions, I think are in pole position when it comes to small business lending. They have the relationships, they got the local knowledge and they've got a really low cost to capital. So all they need to do is adopt a little bit of technology and obviously transform that cultural piece, but they should win that piece of business more often than not when we think about deployment here, I mentioned before, you know, there's a lot of ways to slice and dice deployment sometimes as we try to get to the 100% before we launch. I'm a big believer. Let's get 80% get it out, tested iterated pilot programs, right. Pilot programs I think are a great way to, to show proof of concept to help build the confidence of others internally who might not even be fully aware of once again the opportunity, but they might not even believe that there's a better way forward because they're clinging to the past. How do pilot programs play into the deployment of new types of technologies and really in this particular case, new types of thinking here? Yeah, they're important and you know, there's very uh, guess flavors of pilot programs, anything from a quick trial run this, run this with two or three advisors to see how you feel about it. There's do retro analysis on your data to see what you would have decided using this platform for example. And then there's uh running in parallel with your existing systems for a while, so you get comfort and then you can gradually lean off the parallel systems, expand the scope of a letter Sloan size or number of advisors. There's lots of ways to get to the comfort level that you're required. But there's also, you know, when we look at pilot programs and really like this becomes the new definitive operating model, it doesn't only improve the S and B. S. Experience, the prospective clients experience, but it also improves the employee experience as well from a time reduction savings. Do you have any in any lessons learned from that? Absolutely. In fact, we've been talking about this remarketing perspective, but a couple of our longest standing clients, our biggest fans are the front line employees that are doing the small business lending, you know, and it's often small business lending is with, you know, in the retail branches are with the small business advisors, and they're even expected to do the underwriting in some cases which they don't love to do, not necessarily trained to do. And so they transformed from sort of hating small business lending because it's a ton of work for a small win for them too. Okay, that was pretty easy. And now that's a win and I can get on to managing the relationship like I want to manage it, so it it really can transform an employee experience as well, man, I can't help but just think you're talking through this, you know, another big theme that we've been having on the podcast is this idea of thought leadership, building a personal brand in a digital world, an SMB lender is primed for this opportunity, particularly if they're able to free up time, free up capacity to become a thought leader, to share content in that local market place, to build the relationship digitally and then to be... to service it digitally. It's once again it's almost a it's a double win when we're thinking about this and and to, you know, there's there was research from Gartner that said 70% of small businesses would change their primary bank for digital access to products, so growth opportunity right there gore, this has been a fantastic conversation, a lot of great practical insights, but let's get super, super practical here as we wrap things up because I'm a big believer that all change all transformation begins with very small, simple steps Micro wins if you will, what would be that one small micro recommendation? That small micro commitment a dear listener could make or recommend internally to someone else just to begin to move forward on their journey as we've discussed today. What's that one thing to commit that when it comes to our world, A small business lending, I would say look at however you carve up your, your sort of C. N. I portfolio and there's usually various tiers, take the lowest tier, whether it's up to 100,000 or 250,000 or whatever that is and say, you know, I just want to start with that and I don't need I don't need a system that's going to integrate within every other system right away and talk to them. Just let's do it in bite sized chunks. So it's a stand alone system that we take, the small, the smallest dollar loans. Let's start with that. And just see how it works. Let's get it going and get the ball rolling with that. And once you get that working in the king's, oh, that at a relatively contained risk level, you can start to expand it out and you can integrate with systems and add larger dollar loans and more advisors, et cetera. I like that because I see there's a correlation to that. For example, with Crm, you know, so many financial brands want to move Crm to the corporate level and it's just too much change too fast. It's overwhelming, particularly for those on the front line. And we're like, no, no, no, let's like, let's just focus on one small area here, build a level of confidence through building a level of competence and we move so that the same idea if I'm hearing you correctly would work here, Let's not try to integrate everything and no start small bill progress and then be able to expand it internally. Am I hearing you correctly with this? Absolutely. And it is, what we've seen is as soon as you start to get some momentum building when you've worked out the kinks with, you know if it's loans under $50,000.3 advisors, whatever wherever you choose to focus, if you get that working and people start talking about it and realizing how this works, Then that can snowball. If you start with this big uh big hairy project that you could get stuck before you get the winds. You need to get the momentum. I want to say it was an article from Forbes that I read that 70 and and it's funny you mentioned that the front line here, 78% of people on the front line do not like change at all. Do not move my cheese please. And so by focusing in on a small group, it's a great way. I think you use the word momentum, it's a great word, build some momentum, get some wind in the cells to continue to push the ship forward. Gord. This has been fantastic. If anyone is listening, they want to continue the conversation that we started today. What's the best way for them to connect with? You reach out, say hello? Yeah, they can reach me on my email address board dot basically at judy dot ai. That's grd dot ta iz L E y at j u d I dot ai. So we'd love to hear from anybody that wants to have a follow up shot connect with Gord learned from Gord. You guys are doing fantastic work. Gordon? I really, really appreciate its important work, it's meaningful work and I'm a big believer in supporting the smb market because just like community financial brands are the backbone of the local market, financially, the Smb market is the backbone of the local economy as well. So thank you so much for joining me on another episode of banking on digital growth. Thanks for having me. It was great to be here as always. Un...

...until next time. Be well. Do good and make your bed. Thank you for listening to another episode of banking on digital growth. With James robert. Ley. Like what you hear, tell a friend about the podcast and leave us a review on apple podcasts, google podcasts or Spotify and subscribe while you're there to get even more practical improvement insights, visit www dot digital growth dot com to grab a preview of James, roberts, best selling book banking on digital growth or order a copy right now for you and your team from amazon Inside, you'll find a strategic marketing and sales blueprint framed around 12 key areas of focus that empower you to confidently generate 10 times more loans and deposits until next time, be well and do good.

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