Business Services: There's More to Risk Management than Meets the Eye

Business services offer tremendous growth opportunities for our industry. It’s obvious that credit unions must manage risks when doing business lending. But there are many other aspects of a business services program that carry risk, and credit unions must be prepared to manage them properly. When we consult with a credit union to set up a business services program, we spend a great deal of time discussing a variety of risk management topics. It’s not about minimizing or eliminating risk, rather it’s about managing risk to ensure the proper cost/benefit equation. It is important to consider all the angles, and to take on the right amount of risk, so the credit union can accomplish its desired strategic objectives. Six important considerations are noted below. 1. Should my credit union offer business services, or not? Many credit unions are at this fork in the road. I would submit that not offering business services puts you at risk of not properly serving your members. It’s not in line with the credit union way to say, “No, I’m sorry but we can’t help you,” when there are very cost-effective ways to offer this product line. 2. Should my credit union offer business loans, deposits, and all the other business services, or can we just offer select products? From your members’ perspective, it may not reflect well if your credit union only handles business checking, but does not offer business loan options. You then run the risk of underserving your members. At the same time you reduce the credit union’s growth opportunities. In my opinion, the most basic business product package consists of business checking and savings, term loans and lines of credit, and merchant bankcards. Taking any of these fundamental products out of the mix will reduce the services your business members need to effectively operate; and it’s common knowledge that business owners prefer to have their financial needs fulfilled at one place. Wouldn’t it be great if that one place was your credit union! 3. Buying participations is a great low-risk way to get started with business lending, right? The answer is. “it depends.” Your success as a participant is totally dependent on the lead lender, their capabilities, and their relationship with the borrower. Your credit union must ask the right questions to fulfill the proper due diligence on the originating credit union. The lead must then adhere to strict service standards regarding timely remittance of payments and communication to you as the participant. It is not uncommon in the banking industry for the lead lender to “forget” to let the participant know of problems the borrower is having that may impact the loan. Remember that there is much more than just credit risk when buying a participation loan. 4. Business loans carry all the risk, and I really don’t have to worry about the deposit side, right? Certainly business loans carry significant risk as they are typically large dollars. But there is equal, and perhaps greater risk, with business deposits as they have much higher potential for fraud and operational losses. Overdrafts of $25,000 are commonplace in commercial banking. In addition, chargebacks on merchant bankcards carry transaction risk that can come back to haunt you months later. A new $10,000 business account is fantastic until you realize that the account has been opened for solely fraudulent purposes and $9,500 has been withdrawn. Your business deposit program must be well managed with the risks identified and mitigated through proper knowledge, procedures and controls. 5. Do I really have to hire someone or can I get by with existing staff? If your staff lacks knowledge in business services, you face reputation risk in the community. That doesn’t mean you have to hire a veteran commercial lender, but you will need to dedicate a certain level of resources and training to effectively run your business program. If you don’t, service will suffer and so will your program. Simply stated, you must be able to “talk the talk,” and then back it up with knowledgeable staff and a competent and efficient operating environment. 6. We’ve hired a great business lender and now our program is off and running. Now what? The first risk management question you need to answer is: “What if your new loan officer is not there tomorrow”? You must have contingency plans in place once you decide to offer business loans. You should have sufficient internal resources to handle member contact and solid expertise to complete the analysis and originate the loan. A partnership with a third party for contingency services is a solution that makes sense, as long as that party is able to help on the spot. The second risk management question is: “Who’s watching the business loan officer”? Effective risk management does not allow too much specialized expertise in only one person. Your senior staff must understand business lending enough to ask the right questions and identify issues. Don’t wait for the examiners to tell you of deficiencies in your loan files or policy. The best business services programs I see in the credit union industry have thought through every aspect of managing the risks associated with their program. This includes the deposit side as well as the lending side. Business loans and deposits present a tremendous opportunity, and when the risks are well managed, the program is certain to add value to your members as well as add to your credit union’s bottom line.