Modernize the ag lending process to stay competitive

Editor’s Note: Agrograph is a global agrifinance company focused on data solutions that help industries supporting farmers. BankBeat spoke with its co-founder and CEO, Jim O’Brien, about why ag banks need to step up their tech. 

Q: Before discussing tech, let’s establish how ag lending differs from other types of lending.

Jim O’Brien: Agricultural lending differs in several key aspects, from duration to data to due diligence. Unlike a consumer or commercial loan where the total number or volume of loans is 10 times larger than agricultural loans, the data sources that feed those asset classes (home prices and building materials) are readily available and transparent on pricing, along with well-established cash flow and depreciation models that are set against 10-year or 30-year payback periods. 

Now compare agricultural loans which are broadly categorized into operating, equipment and real estate loans. The most common loans are the annual operating loans that go to the farmer needing seed, chemical and fertilizer inputs to plant their crops. Being annual is a unique risk profile for a lender compared to long-term annuities with predictable depreciation tables and payback periods. 

Q: What specific tech are farmers looking for from their bank, on top of traditional service?

J.O.: As farms get larger and run more like corporations, there is the need for more efficient loan processes, volume discounts and digital services that are not just “nice to haves,” but requirements. 

Farmers want digital experiences that parallel every other aspect of their lives. In fact, nearly 70 percent of borrowers complete a portion of their loan application online and more than 3.6 billion people are expected to bank online by 2024. 

Additionally, the agriculture industry is becoming more technologically advanced. As examples, artificial intelligence, analytics, connected sensors and other emerging technologies aim to further increase yields, improve the efficiency of water and other inputs, and build sustainability and resilience across crop cultivation and animal husbandry. It’s unlikely that the increasingly tech-savvy farmer will be impressed with an outdated, antiquated and in-house lending process. To remain competitive among today’s modern farmers, agrifinance institutions must embrace digital banking practices by sharpening the digital prequalification or preapproval processes. 

But this can also bring challenges. Lenders are responsible for aggregating and validating personal data and reports in real time. This has become feasible using personal credit scores, asset-to-debt ratios, and income streams, which can all be aggregated and verified instantly for the everyday borrower. When evaluating creditworthiness in agriculture, vital factors such as field-level

performance and earning potential aren’t accessible on demand, which can increase risk levels for the bank.

Q: How do you see old-school and new lending practices working in tandem?

J.O.: The human element is still critical; however the agriculture industry has radically transformed over the past 50 years. Farmers need access to financing faster than they did previously, but traditional methods cannot keep pace. Banks that leverage modern technology can accelerate lending decisions. Farmers don’t work like they did 50 years ago so neither should their lenders. 

Q: How do new lending tools boost the bottom line? 

J.O.: In today’s ultra-competitive environment, banks are challenged to speed lending decisions with confidence and attract more farmers with convenient digital products — all while managing risk. Without modern lending tools, banks will lose out to competitors and stifle growth. Growth is virtually impossible without modernizing processes and speeding loan decisions. 

However, risk must be top of mind. It is not enough to offer digital tools. To be profitable, banks must ensure their portfolios consider appropriate levels of risk. Combining these two factors is what will boost the bottom line. 

Today, only a handful of financial institutions have the background to understand the complexities associated with ag lending and properly assess and manage agricultural loans. Risk score tools remove this barrier and allow virtually any financial institution to approach the agricultural industry with confidence and competence, including offering online loan application processes. 

A bank runs a FICO score of the farmer, but Agrograph creates a FICO score of the farm. And it is the farm that in turn creates the cash flow that drives the lenders’ financial analysis. Few banks look at the holistic picture of an operation, mostly because there hasn’t been a product solution to help them make that connection.