April 27, 2020 | Posted by Michael Berman
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6 Minute Read

We all need a little inspiration to brighten these difficult days. I got a dose last week from this story in The Washington Post about how nimble banks and credit unions outmaneuvered many of the U.S.’s largest banks to fill as many Payment Protection Program (PPP) loans for small businesses as possible before funding ran out.

These FIs saw an opportunity and worked hard to seize it for the benefit of both their customers and their bottom lines.

Operational issues tend to take top priority when financial institutions talk about COVID-19. We talk about business continuity management (BCM) and working from home. While these are two critical topics, it’s important that we also maintain a focus on strategy as part of enterprise risk management (ERM).

A good COVID-19 response plan does more than preserve value. It creates value by evaluating and modifying the business model to improve resilience and decrease risk. It’s an effective tool for uncovering operational issues, giving an FI the structure needed to navigate a variety of crises.

Download the Ncontracts eBook Protecting Your Business Model from COVID-19: Assessing Operational Risk Department-by-Department

But it’s also an ERM tool that can help find opportunities. In the case of FIs that scrambled to maximize their PPP lending, they found a way to increase earnings, shore up struggling small business customers, and burnish their reputation all at the same time.

Strategy: Revisiting the Business Model When Circumstances Change

FIs with a clear strategy have clearly defined business models. They know who they serve, how they do it, and why it works. Now is a time to re-examine these models to uncover new needs and adjustments.

Some opportunities will come from new programs, like the PPP program. Others must be uncovered with extra thought and discussion. I recommend following these five steps:

  1. Revisit the business model
  2. Identify issues with COVID-19 with the business model
  3. Assess the impact of COVID-19
  4. Consider changes & assess the risk
  5. Implement changes
1. Revisit the Business Model

When defining the business model, there are four areas that need to be discussed: clients, value, capabilities, and financial structure.

Clients. Think about the FI’s core clients, business segments, and key clients. What are the key needs the FI fulfills for these clients?

Union Bank & Trust, a $4.6 billion-asset bank in Lincoln, Neb., scrambled to be ready to offer PPP loans as soon as the program opened because it knew its customers were depending on it.

“We made it a priority to be one of the banks that offered this lifeline to the businesses we served because those businesses are the lifeblood of our bank,” an executive told the paper.

As a result of their hustle, the bank was ranked second in the nation for approved loans in the first 72 hours of the program, The Washington Post Reported.

Value. Value can be defined with a simple question: Why us? This involves understanding what your FI does to meet needs and create value for these clients.

Capabilities. Assessing the FI’s capabilities requires looking internally at the FIs resources.

Financial Structure​. Identifying key clients and market segments helps an FI know who or what generates revenue. It’s also necessary to identify the expenses involved in providing value to these clients.

2. Identify Issues from COVID-19 with the Business Model

A SWOT (strengths, weaknesses, opportunities, and threats) analysis is more than just a business school exercise. It’s also a good way to identify how COVID-19 impacts your business model. Documenting these changes can lay a foundation for strengthening the FI’s business position.

Strengths like speed and responsiveness can be leveraged. No one was sure when the SBA computer system would start accepting applications so $794-million asset Yellowstone Bank in Laurel, Mont., started trying at midnight East Coast time and kept trying until it had success a few hours later, the paper said.

Another strength is expertise. Union Bank & Trust had an internal SBA expert who tracked legislation, recognized potential pain points with the SBA processing loans, and took extraordinary measures to make sure the bank got additional authorized users for the system.

These banks recognized where they excel and doubled down on it.

3. Assess the Impact of COVID-19

Assess how COVID-19 affects your FI’s business model, including how it changes the client’s needs. Internally, think about COVID-19’s impact on branches, the ability of loan officers to meet with new clients or attract opportunities, and how the timing of these issues affects the FI’s business model.

4. Consider Changes and Assess the Risk

Once an FI understands the specifics of how COVID-19 is impacting or could impact its business model, it can create mechanisms to address the impacts or potential impacts of COVID-19. This may include creating new programs or taking actions such as:  ​

  • Small-dollar loans ​
  • Unsecured personal line of credit to small businesses​
  • “Skip a payment” program to current loans​ (i.e. loan modifications)
  • Unsecured loans with deferred payment plans based on credit considerations​
  • Adjusting overdraft limits ​
  • Waiving interest penalties on CDs ​
  • Increasing mobile/remote deposit transaction limits ​(primary interaction)

There is no one-size-fits-all solution. The more an FI can design the plan to align with its business model and customer needs, the stronger its business plan will be.

5. Implement Changes

Senior management is ultimately responsible for deciding which changes should be made. The decision should be documented along with key questions:

  • What is the goal of the change?​
  • How will success be measured?​
  • What are the key milestones for this change?​ (aka: How will the FI know if it is working?)​
  • What are the key timeframes for measurement?

Union Bank & Trust formed a task force to ensure it had everything needed, including new software that forced the bank’s software developers to pull an all-nighter.

Redwood Credit Union in Santa Rosa, Calif., trained 60 employees on small-business lending to supplement the 20 employees who usually handle the task, The Washington Post reported. “It was like drinking from a firehouse [sic],” chief executive Brett Martinez told the paper.

Once decisions are made and initiatives are implemented, make sure you monitor the results and make adjustments as needed. Union Bank & Trust was overwhelmed with applications from all over the U.S. and decided to limit its lending to existing customers and those in the state of Nebraska.

Revisiting your FI’s business model can help your FI find new or better ways of serving consumer needs and shoring up the balance sheet. As you follow up on your BCP, make sure you find time to take a big picture look at ERM and strategy to be the banking hero your customers need right now.

Michael Berman

Michael Berman

Michael Berman is the founder and CEO of Ncontracts, a leading provider of risk management solutions. His extensive background in legal and regulatory matters has afforded him unique insights into solving operational risk management challenges and drives Ncontracts’ mission to efficiently and effectively manage operational risk.