One of the biggest disruptors to the banking industry in the past several years has been the rise of technologically based financial technology, or the fintech industry. Fintech has brought a new wave of competition by finding more efficient ways to offer many of the same services as banks, including—most recently—lending. As the OCC points out in a recent whitepaper, banks and credit unions need to start thinking seriously about incorporating technology into more of their processes if they are to compete and effectively service customers. As fintechs continue to encroach on core banking services, banks will need to begin to find ways to strengthen and quicken loan origination processes.
According to a 2015 study from McKinsey & Company, 9 percent of fintech companies tracked in the study were making headway in the commercial lending space, an area which made up 7.5 to 10 percent of global banking revenues in 2015. For banks to keep pace, bank management has to ensure that their back-office systems and procedures for loan origination are designed for efficient growth and risk mitigation.
Technology is shortening processing time for loans, and banks and credit unions, in response, need to speed up their loan origination. Fast turnaround time is the currency of the digital age. Perhaps the most striking example of speed in the lending world is Rocket Mortgage, a Quicken Loans app that launched in a splashy 2016 Super Bowl TV ad that boasted minutes-long pre-approval decisions for mortgages.
In order to increase speed in lending, institutions should start by identifying the biggest bottlenecks in their current origination process. For many institutions, it is data collection and entry. Implementing technology like an online client portal for borrowers to upload documents makes it easier to track down all the required paperwork and allows the loan officer to work in digital instead of paper files. Technology can automatically read tax returns and reduce the time loan officers spend on manual data entry.
Of course, getting the data is only half the battle. The loan still needs to be analyzed, risk rated, priced and reviewed by a loan committee, and by using integrated software and standardized templates, the entire process is streamlined, which means getting back to the customer more quickly.
Another competitive disadvantage that banks and credit unions must overcome is the level of regulatory scrutiny placed on loan decisions. When building a competitive loan origination system, banks should focus on implementing processes that accurately identify credit risk and enable defensible, well documented credit decisions. Three key components of a defensible origination solution include:
- Automated data entry and calculations to avoid manual error
- Comprehensive documentation at each step
- Templates for processes and calculations to ensure consistency and objectivity
If an institution wants to process 100 more loans each year, they could hire more staff. Yet, a technology-based origination process also equips the institution to grow without increasing overhead costs and by better deploying staff to high-value activities. Platforms are available that realize time savings and better information flow, giving staff the tools needed to scale the institution.
The rise of fintech in recent years is indicative of the great potential efficiencies offered by technological innovations in banking, and progressive institutions are finding ways to lead this charge. To stay competitive with other institutions as well as fintech, banks and credit unions need to re-examine their back-office processes for loan origination to find ways to increase efficiency in loan origination. Banks can automate data entry and calculations, create consistency through templates for credit analysis, risk rating and loan pricing and prepare for audits and exams more easily with thorough documentation at each step. It prepares the institution to grow, remain competitive and better service its customers.
To learn more about technological solutions for your lending process, download the whitepaper "Tapping Growth Opportunities in the Business Loan Portfolio."