Magazine article Independent Banker

Evening the Score

Magazine article Independent Banker

Evening the Score

Article excerpt

Will big-bank credit scoring in small business lending work long term?

Community banks pride themselves on the personalized service that separates them from their big-bank counterparts. Consequently, they have cornered the small business marketplace by knowing their small business customers well and offering the special advice and flexible terms that most small business owners thrive on.

To close that service gap, however, bigger banks like Wells Fargo have been turning to credit scoring software. They have been using these models to trim off community banks' "bread and butter" small business customers, particularly businesses with less than $1 million in revenue. But the economic turmoil in recent months-the cooling of the economy along with talk in Washington on how to avert a potential recession-- may be the first test of these big-bank credit scoring models.

"In good economic times or in bad, a bank using a credit scoring system can exceed the small business limit of $250,000 and still get accurate scores," says David Arata, a member relationship consultant with the Risk Management Association in Philadelphia. "But banks, large or small, need to be aware that the higher you go above the limit, the less accurate the results are going to be."

More big banks are using credit scoring like a factory line process, using the software models to compete on raw rates to steal small business customers. And while some community banks may use business credit scoring too, they also back those models with personal service and advice if a customer needs it.

And to do it right, small business lending takes a significant amount of time and expertise, industry officials say. Software alone won't replace the demand for personal service by small business owners, community bankers say.

"I don't see the big banks as a threat as long as we give our customers good, competitive service and we are visible and call on them frequently," says Ronald K. Raney, executive vice president at Hampton State Bank in Hampton, Iowa. "The big banks won't to stay in over the long haul. If we hit a downturn in the next business cycle, they will be off to the next 'hot' piece of business that will make them money."

How Scoping Works

In the small business scenario, a credit scoring model determines the odds of whether a small business owner applying will make timely loan payments and not default. Such factors as personal banking history and business liquidity and other related factors-sometimes as many as 25are inputted into the software model, which crunches the figures and then offers an overall score.

The scores for most models usually fall between 300 and 900, with a total score of 620 often providing the magic number for a small business lender. The higher the score, the better the applicant's creditworthiness and the more likely the business owner will be approved with little or no personal review. …

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