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This episode of the BIA Banking Strategies podcast was originally published on BAI Banking Strategies website.
[Lou Carlozo]: For small businesses in 2018 the signs and indicators are complex. Bankruptcies are up, but credit conditions have finally shifted for the better. Some remain battle scarred and debt averse from the Great Recession. Yet, others see this as a time to aggressively pursue growth. How can banks make sense of these signs and take advantage of the times? To find out we’ll talk with Gavin Harding Senior Business Consultant with Experian.
[Lou Carlozo]: Welcome to BAI Banking Strategies where each week we’ll focus on the key issues facing financial services leaders. We’ll bring you objective opinions and actionable insights that will help you power smart decisions. I’m your host, Lou Carlozo, the managing editor of BAI, come on in.
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[Lou Carlozo]: Thanks again for tuning into the podcast. It is great to have you here with us. And today on the program we have Gavin Harding the Senior Business Consultant with Experian Decision Analytics Global Consulting Practice. For more than half of his career Gavin held senior leadership positions with a large regional bank gaining experience in commercial and small business strategy, SBA lending, credit and risk management and sales. Gavin great to have you on the podcast today.
[Gavin Harding]: Good to be here Lou. Thank you for inviting me.
[Lou Carlozo]: Experian in conjunction with Moody’s Analytics has this new report out the Main Street Report. Your window into small business health. So are small businesses healthy right now?
[Gavin Harding]: Small businesses are very healthy right now. When you think of a small business’s performance you think of it two ways one is in terms of you know revenue and overall health, and the other is in terms of access to credit how they pay their bills? For our purposes today we’re thinking more about it from a lending banking perspective. From that perspective, bankruptcies are low and have been low for several quarters. Delinquencies are low and have been low for several quarters. So the fundamentals of small business are very robust very strong.
[Lou Carlozo]: Small businesses are enjoying a great time. That doesn’t mean of course that they’re not without challenges and I’m going to read a portion of the report. Bankruptcies continued to rise in the fourth quarter making 2017 a full year in which bankruptcies increased every quarter. Taken alone this isn’t good news but bankruptcies are coming off historical lows. Give us a little bit more insight as to what is going on here?
[Gavin Harding]: Sure, so let’s go back in time a little bit to the dreaded year 2008 when the world pretty much ended in financial terms. Massive turmoil. We tightened up credit. The whole industry worked through a series of losses. After a couple of years those portfolios were pretty well cleared out. So what was left was decent solid businesses with good fundamentals and a lot of the weak players had been essentially weeded out of the market. So time goes on, small businesses slowly start to invest but they were very leery of taking on a lot of debt but they had made it through the war. So those businesses had good credit performance. They were paying their bills and that went on for several years, and for I think it was 14 quarters. We saw that those small businesses continued to pay on time, continued to be good stewards. And then we get to 2017.
[Lou Carlozo]: And then what?
[Gavin Harding]: So in 2017 there was a lot of change. There had been limited investment from small business for a long time, and there is only so long that you can wait to invest. There comes a point when equipment breaks, when you need to hire people. Businesses became more optimistic. Lenders, bankers, fintech’s started to open up the credit box a little bit broader standard. For 14 quarters we saw that those small businesses continued to pay on time, continued to be good stewards in terms of their investment. Good performance, very low bankruptcy levels, and then they really start to get a little optimistic a little confident, money starts to flow. We would expect that delinquencies would increase a little bit over time. We would expect that low bankruptcy rate to increase. So my perspective on that is that while it is something we should keep an eye on. It’s very much an indication of growth, of confidence, of enthusiasm and investment.
[Lou Carlozo]: What do you see as the most important context heading forward?
[Gavin Harding]: The single most common question we have been asked over the last 18 to 24 months is when is it going to turn? And of course if we knew when it was going to turn I would be a retired multibillionaire.
So the best we can do is look for indications right? and when we look for indications we look for those on a macro level, unemployment, and as we approach and reach full employment what does it do to wage growth? What does it do to access the human capital? And then we also look at it on a more micro level which is you know within our portfolio what are we seeing that’s going to give us that hint?
So if we start seeing instead of a gentle upward trend that we might think about in terms of a return to normality, if we start seeing for instance in our credit card portfolios for small businesses, those delinquencies spike, if we start to see those cards maxed out and delinquencies increase, that could be one of those very early signs.
The other thing just keep in mind is this, the industry and when I say the industry I’m thinking about finance, over the last couple of years, has transformed in many ways. We all need to have a digital presence. We need to engage customers when they want to communicate with us. And when we need to do that with the products that they’re looking for, and at the same time as we deliver this in a very slick quick way we have to maintain good solid robust risk management. And at the same time as we do all of that, we’ve got to make sure the fraudsters are held at bay and we minimize identity fraud and other types of fraud.
So the whole industry has accelerated, it’s very much now about digital technology. Customers are looking for quick and ready access. That opens all kinds of other risks for us. We’re talking about integrated fraud risk. We are talking about you know advanced analytics on the portfolio. We are talking about operational risk, and our favorite kind of risk, regulatory risk, as we work to comply with regulations that are new and still evolving and haven’t been tested yet. So it really is the velocity and sophistication of the industry over the last couple of years has just accelerated beyond anything I think we could have imagined.
[Lou Carlozo]: I think the other consequence of this is clients sometimes getting jittery, getting nervous and one of the things that you specialize in is getting into those situations when things don’t go as smoothly as a client might like, and offering some remediation, some help keeping things calm and moving forward. Tell us a little bit about how you do that work because you do it so well.
[Gavin Harding]: We have clients that have either been in business a long time, or are relatively new to the space and there’s often a common feature in the feature is, that they have grown many times grown rapidly, and what they had in place at the beginning was augmented and there was lots of other stuff bolted on. Prime example, banking client, regional bank, 67 separate systems and applications, none of which spoke to each other are connected.
So you’ve got that rapid growth. You hit a certain kind of critical mass and you have to make the decision and the decision is are you going to stop assess, and identify a better way of doing things, and address all of these legacy systems and reports and legacy data and routines and processes? So in many cases working with clients we’re able to stand back because we’re outside right. We’re outside, we know the industry, we’ve worked with a lot of clients but because we aren’t involved in those processes day to day, we can look at them with a cold eye. We can assess them objectively against some of what we’ve seen other successful clients do. And in many cases, take heavily manual paper based processes and reports and decision making, and make it a lot more efficient, and by efficient, I don’t mean you know automatic approvals I don’t mean artificial intelligence. I mean old fashioned efficiency.
So instead of doing something in ten steps can you do it in three. And when you take that analysis and you spread it across commercial lending for example, or through small business lending, there are some real opportunities to transform the process, to transform the experience of the people that have to work within the process, and ultimately to improve turnaround and accuracy the customer experience itself.
[Lou Carlozo]: Turnaround accuracy. I would say this the banks and financial institutions are very fortunate to have you on their side. Gavin I want to thank you for making the time to be on the podcast today it was a real privilege.
[Gavin Harding]: My pleasure. Thank you.
[Lou Carlozo]: Gavin Harding is a Senior Business Consultant with Experian Decisions Analytics Global Consulting Practice. You can look for Gavin on LinkedIn.
And here are three key takeaways from today’s podcast:
- Bankruptcies are up for small businesses. In fact for four consecutive quarters in 2017 according to the Experian report. But that deserves a long view, post-recession. The small businesses that survived became very debt averse while banks tightened up lending. For small and medium sized businesses 2017 also marked a turning point to address needs such as replacing worn out equipment, or hiring badly needed staff. Some businesses haven’t made it but it’s nothing like the recession and it’s a wave of doom.
- For small businesses in 2018 the news remains very positive, fundamentals are strong. Full employment is here, but there will always be potential storm clouds to keep an eye on. One is credit card delinquency spikes, another, moving too fast to address risks such as fraud.
- Businesses that have experienced rapid growth often suffer from bolted on systems and unconnected applications. In this case rapid growth means slowing it down. It comes down to four steps, stop, assess, identify and address. The endgame, find and implement efficiencies.
[Lou Carlozo]: And now BAI Banking Strategies brings you the aha moment where our podcast guest shines a light on that point in time where realization revelation or exploration made all the difference in their financial services career. Now sometimes before you climb a mountain you’ve got to dig a hole and here Gavin Harding recalls how a visit from a federal regulator taught him a humbling lesson that he carries with him to this day. Listen.
[Gavin Harding]: So let me take you back to Philadelphia in 1999.
Being young and educated I was absolutely sure for a certainty that I knew pretty much everything I needed to know. And into that office walked a Federal Reserve auditor. He asked me a series of questions which I immediately answered, and over the course of an hour I dug a hole maybe 20 feet wide by 30 feet deep. Nice straight sides and I climbed on down into it.
It took seven weeks and hundreds of files to undo the damage I did with reacting, with feeling, feeling that there had to be an answer that would be an answer now. With feeling that, as an executive, I had to have the answers.
So my lesson from that experience and I keep it with me every day and it is part of every interaction with clients. First pause, and then clarify. So make room to think, understand that I didn’t have to give an answer. Understand that “I’ll get back to you” was a much better answer than a whole series of statements that may or may not have been connected, and were not thought out and were not researched. So I am greatly appreciative to the Federal Reserve for training me in 1999 in Philadelphia.
This episode of the BIA Banking Strategies podcast was originally published on BAI Banking Strategies.