Cultivating a new season for digital transformation in Farm Credit

This piece was co-authored with nCino.

Today’s Farm Credit System lenders face a number of crucial challenges. From evolving customer expectations and growing competition to aging legacy technology and an uncertain economic climate, agricultural lenders must innovate quickly to generate growth and become more efficient and effective in serving their customers for the coming decade.

They also deal with frustrating back-office inefficiencies compounded by aging legacy loan origination, document management, and portfolio risk management systems, leading to unnecessary lengthy closing times, frustrating data entry errors and inadequate communication and document exchange across functions and with borrowers. These pain points have been exacerbated during the recent pandemic crisis, which has brought the need to engage in quick and convenient customer interactions across the remote channel into sharp focus. 

At the same time, the 69 associations of the Farm Credit System have long benefitted from a cooperative culture defined by established geographical territories. Farm credit institutions often partner on loan syndications and participations to better serve the needs of their largest and most sophisticated ag producers.

To this end, Farm Credit institutions have an opportunity to create back-office efficiencies at the individual institution level, as well as further their cooperative mission by adopting an industry-wide common platform for loan syndications and document sharing. 

We’ll explore the above pain points in detail, and provide a compelling argument for a single, cloud-based bank operating system as the solution to propel the Farm Credit System forward toward a future built on efficient service and cooperative success.

Chapter 1: A season of change and challenge

The farm credit sector today faces numerous challenges that have only been magnified since the onset of the COVID-19 pandemic.

Farm credit is highly complex and nuanced, with unique pricing factors, multiple types of collateral and a range of specialized variables affecting credit analysis and underwriting. These variables, largely beyond the control of any financial institution, include consumer demand, weather conditions, disease, commodity price volatility, land values, changing regulations, and labor market shortages, among others.

Farmers, ranchers, and producers comprise farm credit’s primary customer base and are today facing significant headwinds compared with just a few years ago. According to the ABA-Farmer Mac Agricultural Lenders Survey taken in August 2020, 79% of lenders noted that farm profitability continues on its recent downward trajectory. The availability of working capital, along with declining income levels, were lenders’ top two concerns for producers.

Uncertainty caused by tariffs and trade policy, along with the lingering impacts of the pandemic and its associated economic crisis also ranked high on the list of lenders’ top concerns for producers.

Lenders also worry about increasing volatility in ag production. Over 87% of those surveyed by Farmer Mac named credit quality and ag loan deterioration as their top or second-highest concern (Figure 2). Nearly 60% expect delinquency rates for ag production borrowers to rise in 2021, and more than 46% expected a similar rise for ag real estate. In addition, weaker loan demand was named as the top or second-highest concern among nearly half of the lenders surveyed (46%).

Farm Credit lenders confront unique hurdles

Although many of these challenges are common among all providers of agricultural loans, Farm Credit lenders face their own set of unique constraints, including rules that impact their ability to serve the full range of their customers’ needs, spread risk across a diversified lending portfolio, and maintain adequate safety and soundness. Farm Credit lenders are also facing growing competition for agricultural loans from new, digital-savvy alternative lenders, commercial and regional banks, and international players.

As a result, there is a pronounced and urgent need for digital transformation. Many Farm Credit lenders are shackled to aging, homegrown on-premises technology systems that have been customized to meet the Association’s evolving needs over time. Ag lenders have long employed underwriting criteria unique to the industry, such as an analysis of total attributed liability to ensure the entire associated risk of the borrowing entity is captured prior to approval.

While such specialized and refined criteria are justified, ag lenders have over time developed customized workarounds making it difficult for homegrown systems to integrate effectively with newer, more efficient platforms. This has resulted in the proliferation of inefficient, manual processes and a profusion of siloed, quarantined data lost within the darkest reaches of the organization.

The use of multiple, disparate systems also relies on arcane, manual processes, resulting in double- and triple-data entry and the increased likelihood of human error. It also slows down time to close and reduces transparency, negatively impacting the customer experience.

COVID is accelerating relationships from in-person to digital

At no time has the need for digital transformation in farm credit ever been greater. As the reality of social distancing and shutdowns thrust itself on the national consciousness, the agricultural lending industry has been faced with a digital reckoning. While the industry had already begun it’s digital transformation, our new ways of interacting in the midst of the pandemic have required agricultural lenders to digitize their interactions with borrowers at an accelerated pace. 

Those Farm Credit System lenders that do not yet offer their prospects flexible and convenient means of submitting applications, tracking loan requests, and exchanging documents remotely will likely fall behind their competitors in farm credit. Without a cloud-based document exchange system, relationship officers and their customers are forced to rely on sending and receiving important documents via insecure and unreliable email, slowing down the approval process and making it difficult to track the process through closing and funding.  

Like other financial institutions, the COVID-19 pandemic has forced Farm Credit lenders to accelerate their digital transformation journey. While daunting, it is important to keep in mind that it doesn’t need to happen all at once. ACAs can balance improved efficiency and automation with enhanced flexibility to serve their customers with high touch, high speed relationship-driven service through a staged approach, tackling the most urgent “microtransformations” one project at a time.

Chapter 2: Phase I: Transforming the association

A critical step toward achieving transformative change in ag lending is for individual Farm Credit lenders to implement a cloud-based solution to create back-office efficiencies at the institution level. The system must be flexible, configurable, easy to upgrade, and support pre-built integrations to the lender’s core, loan documentation solution, and other key technology providers.

Flexible, cloud-based technology can also help address fast-changing market developments and regulatory updates. One high-profile example of this was the federal government’s passage of the CARES Act, a sweeping, $2.2 trillion emergency stimulus package to help rescue the nation from the economic fallout of the COVID-19 pandemic. A key provision was the $349 billion Paycheck Protection Program (PPP) (later expanded with an additional $310 billion in funds).

Lenders had to pivot quickly to accepting relief loan applications from their own customers, as well as prospective borrowers in difficult financial straits. Without the benefit of an efficient and highly effective loan operating system that incorporated the SBA’s unique approval criteria, coupled with a user-friendly cloud-based digital interface, many lenders were unprepared to process loan volumes that may be many times greater than normal.

Chapter 3: Phase II: Transforming the System

Digital transformation can also lift the entire Farm Credit System to new heights.

The System has an opportunity to increase competitiveness and further its cooperative mission by adopting an industry-wide common platform to support deal syndication, loan participations, document exchange, and communication.

Syndication and participation is vitally important to the Farm Credit ecosystem, and for good reason. It represents one of the few ways for ACAs to grow and diversify their loan outside their home territories. Syndication also benefits system banks, which can source and exchange loans from outside their districts, and help strengthen their Associations, which rely on the sharing of credits across the System as a whole.

Digital transformation at this scale offers the Farm Credit System a unique opportunity to leverage a system-wide platform that provides secure document exchange, data sharing, rich data insights, and back-office automation. Thereby taking full advantage of its inherent strengths, size and collaborative mission

Such a solution could foster intra-system loan participation and syndication, as well as support deal participations with lenders outside the Farm Credit System.

In an ideal world, for a large syndicated deal, all lenders would have access to the same data and would operate on the same platform. Such an approach would allow for the secure electronic exchange of financial documents cleanly uploaded to each lender’s document filing system. In addition, each lending institution would be able to utilize the same loan application interface, underwriting system, and basic workflow, allowing key financial data to be uploaded automatically and captured accurately within the relevant system fields. This would essentially eliminate all manual data entry, reducing human errors caused by double- and triple-entries and allowing decisions to be made quickly.

Under this construct, the borrower would enjoy a better customer experience, with greater transparency into the loan cycle and faster loan decisions. It would also enable the Farm Credit System to fully leverage its cooperative structure to compete more effectively with non-system ag lenders, unleashing its collective power and size to serve its traditional customer base.

Chapter 4: Phase III: Farming a fertile field: Harvesting the benefits of a cloud-based solution

In order to harness the full benefits of the Farm Credit System’s unique charter and mission, ACAs and system financial institutions should unite around a single, cloud-based bank operating system that offers the following benefits:

• Flexible configuration: Due to the Farm Credit System’s unique regulatory requirements and unique borrower attributes, the technology should offer more than simple customization. The nCino Bank Operating System can be quickly and easily configured to address an institution’s specific needs.
• Faster decisions: The ideal system offers configurable workflow and tracking tools to reduce operational bottlenecks and minimize loan cycle times. The result is quicker, more accurate loan decisions and the ability to support a higher volume of applications.
• Unbeatable scalability: The ideal solution is designed to grow with an institution as it expands its loan portfolio over time adding new value and increased efficiency along the way. It is also flexible enough to serve the needs of a single ACA, or collaborative data and document sharing across multiple institutions.
• Implementation at speed: In a world that changes quicker than a combine can harvest a field, lenders need to deploy new features and functionality immediately. nCino offers a range of implementation approaches designed to meet the needs of every size institution. Professional Services implements the nCino Bank Operating System through a phased approach, offering best practices to eliminate inefficiencies, improve strengths and maximize productivity through a project-based deployment.
• Deep data insights: Especially during periods of rising delinquency and high economic uncertainty, ACAs must be able to manage risk across their entire loan portfolio, segmented by geography, customer type, commodity type, loan size and other key attributes. With real-time volume reports available at the click of a button, management can track the loan pipeline and critical service metrics like time to approval and time to close, on demand.
• A transparent, global view of the customer: nCino’s built-in integration with leading core systems provides internal users with a comprehensive view of the client relationship, available anywhere and anytime.
• Integration excellence: The ideal system will support numerous industry-leading integration partners, including solutions for electronic signatures, credit bureaus and document preparation.

Conclusion

Today’s Farm Credit System lenders face a number of crucial challenges. From evolving customer expectations and growing competition to aging legacy technology and an uncertain economic climate, ag lenders must innovate quickly to generate growth and become more efficient and effective in serving their customers for the coming decade.

An initial step is for individual ACAs to adopt a single cloud-based, end-to-end commercial lending and portfolio management solution within the individual institution. Rich data insights powered by cognitive technologies will help power individual lenders to achieve greater operational efficiencies, accelerated speed to market and a better, more transparent customer experience.

Once this threshold is reached, it will empower the cooperative movement to collectively achieve higher growth and greater competitiveness, while helping to propel the Farm Credit System toward a fertile future of success.

Judy Slimm is a regional vice president at nCino, focused on transforming America's Farm Credit System through innovation, reputation and speed. A graduate of UC Berkeley, Judy has over 25 years of experience in the financial services industry and has spent the last decade working with the US Farm Credits.

About nCino
nCino is the worldwide leader in cloud banking. Its Bank Operating System improves employee efficiency while enhancing the customer experience for onboarding, loans and deposits across all lines of business. Transforming how financial institutions operate through innovation, reputation and speed, nCino works with more than 1,100 financial institutions globally whose assets range in size from $30 million to $2 trillion. A proven leader, nCino is part of the Forbes Cloud 100 and was named the #1 "Best Fintech to Work For" by American Banker. Follow @nCino or visit www.ncino.com.