4.5 Minutes Read.
Automated loan underwriting is one of the fastest-growing areas of digital transformation for businesses seeking to improve the customer experience and operational efficiency. The lending industry has been a trailblazer in automation, in large part because of an increasingly challenging business environment.
Developments in underwriting tech have answered lenders’ need for new tools to stay competitive and profitable. Pressures on the business lending market have kept up the pace of innovation in underwriting tech, with new features and capabilities constantly being introduced.
“Sluggish” is the word most industry leaders, and observers use to describe the business lending environment. The situation has persisted since early 2016 and seems likely to continue for some time to come.
The slowdown in loan growth is attributed to a couple of different factors. Trade tensions have played a big role in increasing uncertainty for businesses. These began with the removal of tariff exemptions on steel and aluminum from Canada, Mexico and the EU, and grew worse as the “trade war” between the U.S. and China erupted last year. From the banking side, a flattening yield curve – the difference in interest rates between 10-year and 2-year government bonds – also has had some effect, because it discourages lenders from lowering interest rates.
This effect tends to make loan growth slow even more, because a flattening yield curve is widely seen as a sign of a future recession. Economic recessions, which are obviously not good for businesses of any kind, have followed periods of flatter yield curves four times since 1974. Knowing this, many companies have become more hesitant to borrow, either putting off plans to expand their businesses, or at the very least, assessing their credit needs much more carefully before seeking loans.
Making The Most Of The Market
None of this means that business lending has stopped, of course. Businesses still do need to fund their operations and expansion and, in fact, the lending market is still growing, simply at a slower, more cautious rate.
The customer experience is the biggest source of competitive challenge and opportunity for lenders.
Interest rates were, at one time, the biggest selling point for traditional lenders. Everyone offered the same or very similar loan products and the same or very similar application and approval processes, and sought to gain a competitive edge by providing lower interest rates. Now the situation has reversed; there is not as much differentiation in interest rates, but much more opportunity to gain a competitive advantage in offering a better customer experience.
The Connection Between Customer Experience And Productivity
Improving the customer experience and process efficiency go hand-in-hand for lenders. Banks and other traditional lending institutions have long dismissed the small business loan market as being unprofitable because traditional processes made these smaller loans unprofitable. Unfortunately for these lenders, the small loan market – small businesses and individuals – is the fastest growing part of the overall loan market. These potential customers have two key characteristics.
First, they are the most demanding in terms of improved customer services; not coincidentally, many of them tend to be younger and more tech-savvy. Second, many of these customers, particularly small business customers, do not fit traditional credit scoring categories and processes, and would under conventional methods take more time to process or be summarily rejected despite actually being good credit risks.
Lenders have recognized that there is a broad and potentially very profitable market available among customers they may have previously ignored if they can meet their demands for more convenience and faster loan decisions. Meeting these demands necessarily means improving productivity. Lenders are looking for ways to reduce friction points such as multiple customer contacts from different offices for the same information, and reducing the amount of time spent on non-core business activities.
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The Answer Lies In Automation
Automated loan underwriting has proven to be the tool to allow lenders to offer a better customer experience through streamlined, more efficient processes. Automated lending programs reduce the number of steps in the loan process.
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This allows the lender to manage a far greater volume of applications in the same amount of time. The data management capabilities of automated programs also ensure a high degree of accuracy by reducing human entry of information that can lead to possible errors.
- Customer convenience: Automated lending programs offer customers “apply anywhere” convenience through web or mobile applications. Information and documentary data entered at this point is on-boarded directly into the system, eliminating additional data entry steps and follow-up calls or messages for more information.
- Data accessibility: Customer information in the automated system is available to everyone who needs it, from the loan originator, to underwriters, to credit investigators and management. This allows for faster processing and better monitoring of business in progress. The system can also readily update customers as to the status of their applications.
- Credit scoring flexibility: Machine learning and data management allow for far greater flexibility in building credit profiles, using many more data points than traditional scoring models. Lenders can create their own credit rules, accommodating a wider range of customers while still safely managing risk.