Regulator Warns Climate Change Poses a Financial Risk

Interviewed June 10, 2019, by the NY Times, Rostin Behnam warned, “If climate change causes more volatile frequent and extreme weather events, you’re going to have a scenario where these large providers of financial products – mortgages, home insurance, pensions – cannot shift risk away from their portfolios.  It’s abundantly clear that climate change poses financial risk to the stability of the financial system.)  Mr. Behnam is one of the five members of the Commodity Futures Trading Commission.

This isn’t the first call to action.  The Securities and Exchange Commission began requiring public corporations to disclose bottom-line risks associated with climate change way back in 2010.  More recently, an international coalition of 39 central banks began studying the effects of climate change on financial markets. 

While the risks posed by natural disasters cannot be avoided, as Mr. Behnam points out, the tools are now available to quantify that exposure to a portfolio.  That’s the first step in mitigating the risk of a natural disaster impacting a portfolio of insurance policies, loans, accounts receivable, or investments. Being able to quantify the amount of exposure to potential weather events or other natural disasters also applies to vendor supply chains.

After that it is a relatively simple matter of taking those risk probabilities and evaluating their concentration within a portfolio.  We can identify the probabilities of businesses and households in California being impacted by wildfires, mudslides and earthquakes; along the Gulf Coast facing wind damage, storm surges and run-off caused by hurricanes; and in the Midwest being inundated by floodwaters.

Monitoring risk exposures is all well and good, but the process should start when you are vetting the loan prospect, customer, vendor or investment.  Underwriters and credit analysts have traditionally focused on financial risks, as well as political and currency risks when cross boarder transactions are involved.  Granted, insurers may look at environmental risks with some types of policies, but that factor can be overlooked with other products, leaving the door open for a natural disaster to impact a portfolio in unexpected ways.

Whether you are looking to upgrade your vetting process to include environmental risks or you want to identify and monitor your exposure to climate change events and other natural disasters across your portfolio, we can provide the site-based intelligence you need to implement an action plan. The potential savings will dwarf the costs of acquiring the actionable intelligence to mitigate your exposure.

The Reality of the Market for SBA 7(a) Lending: “Plenty of Room for Growth, But a Need for Targeted Marketing”

As experienced SBA Lenders know, the 28 million Small Businesses nationwide is not the actual size of the market for 7(a) Loans. It is much smaller because only 10% of Small Businesses can qualify for an SBA loan on both an eligibility and credit worthiness basis. Accounting for these this factor and several others, a market size of roughly 1.5 million for SBA 7(a) Lending seems more realistic - smaller, but still large enough to support the future growth of 7(a) Lending.

In 2018 more than 60,000 small business were financed through SBA Programs. While it was a highly successful year, from another perspective it represents only 3% of the potential market. There is plenty of room for growth!

In our view, many Community and Regional Banks have the greatest potential to grow their SBA Programs by identifying and developing the growth potential of their local markets. To realize this growth, we believe Targeted Marketing Programs are needed.

Our Program, SBA Market Insights, provides Community and Regional Banks the key element of all successful targeted marketing programs: the capability to identify SBA Loan Prospects in their markets with a high probability of becoming a funded loan.

These are High Value SBA Prospects because they have these characteristics:

  • They meet SBA Eligibility and Creditworthiness Qualifications

  • They have a low probability of defaulting on loan payments

  • They operate in one of the top 20 industries accounting for 76% of all 7(a) Loans

  • There is information on them readily available to evaluate their business and credit profile

  • There is current, detailed contact information on them to focus a target a marketing program

  • They have a need for financing within 90 days

Community and Regional Banks do not need to lend out of market to grow. They need better marketing tools to identify SBA Lending Prospects that will enable them to grow locally and lend sensibly.

Meeting the Challenge

A recent study by fintech provider Fraedom found that 86 percent of bankers believe challenger banks pose an increased threat to their business, with over half that group seeing challenger banks as the greatest threat. What makes challenger banks so threatening is their technology platforms. To compete, other banks are being forced to invest in technology and update their legacy systems.

Technology in and of itself is not a total solution. The bottom line is preventing customer attrition. While new online banking capabilities help, the real key is building customer relationship. One way to do that is to sell your customers additional financial products.

Based on 30 years helping banks expand their small business portfolios, we have found that businesses that use over 2.5 financial services from a bank are much more likely to remain a long term customer and provide a return on investment many times over the banks acquisition costs. Our research shows that going from 1 to 2 products increases direct margin by 10 times and going from 2 to 6 products increases direct margin by 42 times.

We provide two programs that identify a bank’s internal opportunities to sell additional products. They are:

  1. Identifying small business customers that have a high propensity for requiring additional financial products. We have product use propensities for 16 different financial products along with wallet size (cash and loan) and customer life-cycle. By appending this information to your commercial portfolio, we can identify your high value opportunities.

  2. Identifying business owners and executives that are retail only customers of your bank. We find that anywhere from 8 to 20 percent of a bank’s or credit union’s retail accounts will be business owners. We do this by having linkages for over 24 million owners/executives between their residence and their business. The conversion rate for these in-house prospects is typically 4 to 8 times that of external small business prospects and we have witnessed marketing campaigns directed at this group exceed 1000 percent return on marketing investment.

In any environment, one key to bank profitability is fostering organic growth and thereby reducing attrition. Technology alone is not the answer to the treat posed by challenger banks, but combining new online banking services with smart, targeted marketing campaigns that address the opportunities already residing in your customer portfolio can make a big difference. In the final analysis, it’s all about realizing the profit potential of your customers base.

Thoughts on Small Business Card Growth Projections and Discover’s Return to this Market

By David Schmidt

US credit card volumes went through some growing pains after the recession, but have rebounded nicely and are generally thought to be healthy according to a Mercator Advisory Group study[1].  Nevertheless, growth appears to have plateaued with Mercator reporting 63 million new accounts in 2017 with the same number forecast for 2019.

Small Business Cards, however, are expected to grow to about $700 billion by 2022 from the current level of $536 billion in transactions.  The biggest opportunity in the small business sector is with small businesses employing fewer than 20 people.  These businesses often rely on the owner’s consumer cards, but in doing so forego account controls, reporting, and rewards tailored to businesses.

Discover’s return to the small business market clearly looks to take advantage of this projected growth.  For the same reason, banks should be looking to grow their card portfolios as well as the profitability of their small business customers.

We have found that small business accounts can be a very profitable segment for banks when commercial account holders subscribe to more than two financial products.  Getting a commercial customer to add a credit card account can therefore be a good way to seal the relationship.

Here are several suggestions on how best to proceed:

  • The benefit of promoting cards to existing business customers is increased account longevity, thus multiplying profits over time.  However, you will want to focus on businesses that are either in a growth or mature lifecycle stage, and avoid businesses that are in the static/decline stage due to the associated higher risks and lower profit potential of these firms.

  • In addition, identifying business owners from a bank’s retail file, who are not commercial account holders, provides an opportunity to acquire new accounts at much lower costs than campaigns directed at external prospects.

  • When reaching out to external prospects, your targeting should include selectors that indicate proximity to your branches, less than 20 employees, a growth or mature lifecycle stage, acceptable credit risk and significant wallet potential.

OX2 Solutions Corporation can help optimize your small business outreach by providing insights on internal and external prospects that are proven to drive marketing efficiency.

[1]U.S. Small Business Credit Card Forecast, 2017-2022:  Healthy Market, Room for Improvement” – Mercator Advisory Group, March 2018.

The Keys to Reaching 'Near Bankables'- the Underserved Small Businesses


Online and other alternative lenders benefit from providing lending services to the small businesses that are underserved by the traditional banking community.  The challenge is identifying those small businesses that are credit-worthy but unable to secure the lending facilities they require from their bankers. To be able to market efficiently, alternative lenders need to target small businesses that have a high probability of needing a loan as well as acceptable risk characteristics.

Finding these prospects requires going beyond standard demographics.  Business size, which is often used as a primary selector, can be misleading.  Businesses in different industries are subject to different financial dynamics that affect demand for loans, so a smaller firm in one industry can both have a greater demand for lending services and require larger lending package than a bigger firm in another industry.  And because almost all small businesses are captive to the characteristics of their local markets, local economic trends will also affect their demand for loans.

Targeting underserved small businesses requires a multi-step process that overlays analytics and enhanced selectors such as loan demand and financial indicators.  Here’s what you need to do:

1.    Target:  Identify the businesses in your target segment that have a high probability of needing a loan and that also offer acceptable risk characteristics

2.    Prioritize:  This pool of small business candidates then needs to be prioritized based on those businesses that display the highest loan potential with the least amount of risk

3.    Select:  From this prioritized pool, you can then select the top candidates for your marketing efforts

The benefits of this approach, compared to the use of standard demographics to generate a marketing list, are higher response rates, translating into more loan applications received.  In addition, a higher percentage of loan applications will be approved due to the pre-screening, and those loans will be bigger as well. The result is greater marketing efficiency and lower underwriting costs.