Lending Automation: The Risk of Delayed Entry

November 4th, 2016

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Technology is rapidly enhancing the banking industry’s ability to comprehensively and efficiently evaluate the credit worthiness of businesses and consumers alike. The abundance of available information on borrowers and the effective management of big data enables banks to minimize risk, reduce defaults and maximize returns. The challenge is leveraging that data to realize its full potential value.

Data and technology go hand in hand. Banks already have a lot of great data on the customers they serve. The problem is, unless they take advantage of available technology, most banks won’t come close to maximizing the value of the customer information they have collected.

Only through technology can banks collect, aggregate and analyze massive amounts of data in a timely manner, allowing for quick, accurate decisioning of borrower information and the streamlining of the myriad of steps that make up the end-to-end lending process. Financial institutions that do the best job of adopting new financial technology stand to gain a huge competitive advantage over those that lag behind.

For those banks slow to adopt state-of-the-art lending technology, the risks of falling behind are significant. The failure to take advantage of the innovative resources available today puts the bank at a competitive disadvantage, and has negative impacts both financially and in terms of human costs.

Customers have grown to expect the convenience and speed that come with a digital experience and judge their financial institution by how it meets those technological expectations. As a result, customers are seeking out banks with a strong fintech brand. With both business and personal borrowers, one of the key drivers is the speed in which they can have access to the capital they need to solve their financial problems. Banks that respond the fastest typically have incorporated technology into the lending process. That results in increased customer retention and higher customer satisfaction scores.

Technology not only impacts the bank’s “customer experience,” it has a major impact on the quality of the “banker experience” as well. Technology enables bankers to focus their energies on activities that enhance their productivity. When customer data is quickly translated into actionable information, it allows bankers to ask better questions, solve more problems and meet more customer needs. This enhanced “banker experience” results in greater employee retention, loan portfolio growth and increased account penetration.

Efficiencies gained through technology also have a big impact on profitability. Loans that were once loss leaders are now able to be executed profitably. It costs just as much for a bank to take a $25,000 loan through the underwriting process as it does for a $900,000 loan. With the efficiencies gained through technology, smaller loans that were once loss leaders may now be executed profitably. This impact can best be seen in the critical small business lending space. Loans that have not been pursued by banks, and in some cases even turned away, are now able to be done profitably, which opens up new markets for banks and helps them better serve their local communities. Technology enables the collection, aggregation and analysis of data in a much more cost effective way and allows for automated, streamlined processes that enhance profitability.

Finally, regulators are also trending toward more comprehensive risk analysis and the expectation of predictive modeling as an objective way to make lending decisions and monitor loan portfolios. Current Expected Credit Loss standards (CECL) are being developed requiring “life of loan” estimates of losses. More and more, banks have to rely on their ability to manipulate available data as a way to meet the regulators’ demands. That kind of analysis is difficult to accomplish consistently and accurately using manual processes, but is much easier to achieve with technology.

Embracing financial technology is the key to survival in the lending world. Banks that adopt new lending technologies early will have significant advantages in the marketplace and will slow market share losses to aggressive, tech-oriented marketplace lenders.

mdillon

Mike Dillon is the national sales director at Akouba.  Mr. Dillon brings more than 30 years of financial services expertise to Akouba, most recently running North American Small Business Sales for BMO Harris Bank.