The cloud-based banking software provider nCino (NCNO -3.26%) sells technologies to financial institutions. Banks use nCino to automate many parts of the loan origination process to generate more volume and better leverage data. The market has sold off bank stocks this year on concerns about an economic slowdown and potential recession, which banks may struggle with due to the cyclical nature of their business. What could this mean for nCino’s business?
With the jury still out on whether we’ll see a recession in the next six to 18 months, investors should think about how each stock in their portfolio will perform if the economy takes a turn for the worse. Let’s take a look at nCino and see how its business could hold up in the event of a recession and its target customers start to struggle.
NCino is not a bank
Understanding banking technology is not an easy task, but the first big thing to understand is that while nCino can serve banks, it is by no means a bank. It does not take deposits or make loans, and therefore is not as dependent on consumers or small businesses as an actual bank.
nCino’s goal is to make the loan origination process more efficient and smooth for loan officers and borrowers. nCino’s platform connects a bank’s front, middle, and back office employees with customers and third parties to reduce manual labor. For example, nCino can largely eliminate manual data entry with its automated dissemination technology, which can extract relevant data from financial documents, minimize errors, streamline the underwriting process, and reduce the time required to analyze and disseminate data. financial by more than 75%, according to the company. The platform also allows bankers to remotely and securely access their lending system, which was obviously huge during the pandemic. nCino also provides many analytical tools that bankers can use to discover loan pricing, identify credit trends, and find new lending opportunities.
nCino also has a very different operating model from a bank. Banks make much of their income by collecting deposits and lending them out in order to earn money on the spread. Banks also derive commission income from other activities such as wealth management and investment banking. nCino makes the bulk of its revenue through a recurring subscription revenue model that it charges per bank employee using the software. Contracts with financial institutions can run for five years and grow in value.
Sales in an economic downturn
The banking industry as a whole doesn’t have the best reputation for being on the cutting edge of technology, although few realize how important it can be for banks to implement new core banking technology. But I think the industry is definitely at an inflection point – banks are realizing that in order to keep pace with all the competition and just deliver the services and experiences that consumers and businesses expect these days, they will have to take the step.
“Look, we’re seeing a lot of eyes in the market and looking at the macro picture. But I don’t hear a lot of banks talking about whether they need to digitize and whether they need to digitally transform. We just think that’s where lies the industry go,” said Josh Glover, president and chief revenue officer of nCino, during the company’s recent earnings conference call.
He added: “Whether interest rates are up or down, our banks aren’t going to want to lend money any slower to their customers, are they? They won’t want to offer a less competitive experience.
The other thing to consider is that with the Federal Reserve rapidly raising interest rates, banks expect to make more money as yields on many of their assets, such as loans, will rise. . Many banks are also realizing that they need to become more efficient and increase revenue while keeping expenses flat or reducing expenses. While implementing a new system like nCino can be a bit of an investment and disruptive to day-to-day operations, there is definitely a payoff. On average, nCino claims that its clients see a 40% decrease in loan closing time, a 92% reduction in data re-entry rates, a 13% decrease in loan delinquencies, a 25% increase in efficiency and a 127% increase in account openings.
The company must be resilient
Based on the long contracts that generate recurring revenue and the fact that the banking industry seems to understand the need to digitize and automate its operations, I think nCino can still perform solidly in a modest recession. The company already has 12 of the world’s top 25 banks as customers, so those that don’t have similar technology or don’t build their own systems are likely to be at a disadvantage regardless of the macro environment – which is why I think nCino’s business should be somewhat resilient in times of recession.