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In recent years, the private credit industry has surged in popularity, becoming a dominant player in the commercial lending market. This rise has been fueled by several factors, including regulatory constraints, banks’ inability to adapt to shifting client demands, and inefficiencies in traditional lending models. As private credit firms continue to grow, banks are at risk of losing market share in this lucrative sector. However, by addressing the challenges that have driven borrowers toward private credit, banks can regain their competitive edge. In this blog, we’ll examine those challenges and present ways that banks can overcome them, including through the use of AXIS by AIO Logic.

Challenges Banks Face in Competing with Private Credit

To understand how banks can reclaim their standing, it’s essential to examine the key challenges they face in competing with private credit firms. These challenges have been both structural and regulatory but are not insurmountable, if addressed in a strategic fashion.

1. Regulatory Compliance and Capital Requirements: Traditional banks operate under tight regulations that restrict the amount of risky loans they can issue. They are required to hold substantial capital reserves and comply with strict loan-to-value (LTV) and debt-to-income (DTI) ratios. Private lenders, meanwhile, have more leeway in structuring loans that may not meet conventional criteria.

2. Inflexible Lending Models: Many banks still rely on legacy systems that prioritize cookie-cutter loan products rather than tailoring solutions to the specific needs of commercial borrowers. This rigidity makes it difficult for banks to serve mid-market companies, especially those with complex financial needs that don’t fit neatly into traditional loan models.

3. Inefficiencies in Loan Origination and Underwriting: The commercial loan process at banks can be slow and cumbersome due to layers of internal checks, manual underwriting, and outdated systems. These inefficiencies hinder banks’ ability to provide quick approvals and funding, driving borrowers toward more nimble private lenders.

4. Lack of Adaptation to New Technologies: While private lenders have embraced new technologies such as artificial intelligence (AI), automation, and data analytics to optimize loan origination, servicing, and portfolio management, many banks are still lagging in this area. This has given private lenders a significant competitive advantage in terms of both speed and cost-effectiveness.

How Banks Can Overcome These Challenges

Despite these challenges, banks can still regain market share in commercial lending by addressing the root causes that have driven clients toward private credit. The following strategies, along with powerful platforms such as out AXIS by AIO Logic software, can help banks remain competitive in this evolving landscape:

1. Investing in Technology and Automation

One of the most critical steps banks can take is to adopt automation and AI in their loan processes. By automating repetitive tasks such as loan origination, underwriting, and servicing, banks can significantly reduce turnaround times and operational costs. Technologies such as AI can enhance underwriting models by using alternative data sources, improving risk assessments, and allowing banks to offer more flexible loan terms. Automation also allows banks to scale their operations without proportionally increasing staffing levels, helping them to compete with the speed and efficiency of private lenders.

When building our AXIS by AIO Logic platform, we utilized two types of artificial intelligence – neuro-symbolic and large language models – to automate tasks throughout the loan lifecycle. Using these types of AI, AXIS automates complex workflows across a broad range of commercial and structured loan types, eliminating process fragmentation and error. Additionally, AXIS’s automation can perform tasks, analyze data, and execute processes faster and more accurately than humans, leading to substantial efficiency gains, error reduction, and cost savings.

2. Offering Tailored Lending Solutions

Banks must move away from one-size-fits-all loan products and focus on offering more personalized financing solutions that can cater to mid-market companies with unique needs. By developing specialized products such as ABL or cash flow-based lending, banks can address the financing requirements of underserved markets. Tailored lending models will help banks compete directly with the customization offered by private credit firms.

Thanks to the robust functionality of AXIS by AIO Logic, our platform can easily handle complex workflows and bespoke facilities. In fact, AXIS has native handling for every commercial loan structure including amortizing, revolving, ABL, delayed draw, real estate, factoring, and many more. AXIS also provides independent functionality for Current and PIK interest, and for simple and compounding interest. Plus, for variable rates, AXIS allows users to choose the desired index, select the calculation logic, and set the margin to be added to the index rate.

3. Embracing Digital Transformation

Many banks still rely on legacy systems that hinder their ability to adapt quickly to changing market conditions. A digital-first approach can help streamline the loan approval process, improve customer experience, and facilitate data-driven decision-making. Banks should focus on integrating advanced analytics platforms that can provide real-time insights into borrower creditworthiness, market trends, and portfolio performance. This will allow them to react more quickly to opportunities and risks in the market.

Here at AIO Logic, our leadership team has decades of experience in the commercial lending industry, so they are fully aware of the importance of advanced analytics. For that reason, we placed a heavy emphasis on analytics when building AXIS by AIO Logic. AXIS’s AI rigorously analyzes vast amounts of data quickly and accurately to automate real-time underwriting, borrower financial health monitoring, collateral analysis, portfolio risk, and policy compliance. Additionally, AXIS’s AI provides real-time insights into operational performance, enabling institutions to monitor key metrics and KPIs continuously.

4. Forming Strategic Partnerships

Banks can also form partnerships with private credit firms or fintech platforms to expand their lending capabilities. By collaborating with alternative lenders, banks can co-lend or participate in syndicated loans, allowing them to tap into the flexibility and speed of private credit while still meeting regulatory requirements. These partnerships can also provide banks with access to new clients and markets.

For banks interested in utilizing syndicated loans, AXIS by AIO Logic provides robust functionality for syndication and participation including pool and single loan structures. This functionality also allows investors to trade in and out of loans and pools, and individual loans can be bifurcated into more than one pool with full automation intact. Additionally, AXIS provides automated calculation and tracking of capital calls, loan proceeds, and required distributions based on user-set parameters. AXIS’s functionality includes automated handling for pari passu, stated return, and hurdle return structures.

5. Streamlining Internal Processes

Many banks suffer from bureaucratic inefficiencies that slow down their ability to respond to market demands in a timely manner. By simplifying internal processes, banks can enhance their agility and responsiveness. Leaner processes, coupled with increased automation, will allow banks to offer faster loan approvals, reducing the time it takes to serve clients and putting them on a more level playing field with private lenders in this aspect.

As a truly end-to-end loan origination, management, and servicing platform, AXIS by AIO Logic is uniquely capable of streamlining processes across the entire loan lifecycle. With AXIS’s best-in-class architecture, firms can significantly improve their organizational efficiency by 3x at each stage of the loan lifecycle. Additionally, AXIS’s native data integration and AI-powered automation eliminates process fragmentation which allows firms to further streamline processes.

Conclusion

While private credit has gained a strong foothold in the commercial lending market, banks are far from powerless in the face of this competition. By investing in technology, offering tailored solutions, and streamlining processes, banks can overcome the challenges that have allowed private credit to dominate. The key lies in embracing innovation and adapting to the needs of modern borrowers—ultimately allowing banks to reclaim their position as leaders in commercial lending. If your bank is seeking to embrace technological innovation, please feel free to contact us today to schedule an intro call and learn more about all that AXIS has to offer!