4.5 Minutes Read.
Automated loan underwriting is one of the fastest-growing areas for businesses seeking to improve the customer experience and operational efficiency. The lending industry has been a trailblazer in automation amidst an increasingly challenging business environment.
Developments in automated loan underwriting have answered lenders’ need for new tools to stay competitive and profitable. Pressures in the business lending market have driven innovation in underwriting tech, leading to the constant introduction of new features and capabilities.
Since early 2016, most industry leaders and observers have described the business lending environment as “sluggish.” This slow growth has been attributed to a few different factors.
Trade tensions have played a big role in increasing uncertainty for businesses. This 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 – has also discouraged lenders from lowering interest rates.
This effect tends to slow loan growth even more because a flattening yield curve is widely seen as a sign of a future recession. Economic recessions 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. On the contrary, 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 loan products. Many used similar loan application and approval processes and sought to gain a competitive edge by providing lower interest rates. Now the situation has reversed. While there is not as much differentiation in interest rates, there is much more opportunity to gain a competitive advantage in offering a better customer experience.
While conventional loan application processes have traditionally made small business loans unprofitable, lenders are improving the customer experience by automating much of the process. Now, the small loan market – small businesses and individuals – is the fastest growing part of the loan market. Customers that are applying for these small loans 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. Using conventional methods, they usually take more time to process or are rejected despite being good credit risks.
Lenders have recognized that there is a broad and potentially profitable market available among customers they may have previously ignored if they can meet their demands for convenience and faster loan decisions. Meeting these demands 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 itself to improve the 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 manual data entry and the potential for human error.
- Customer convenience: Automated lending programs offer customers “apply anywhere” convenience through web or mobile applications. Information entered at this point is on-boarded directly into the system, eliminating additional data entry steps and follow-up messages for more information.
- Data accessibility: Customer information in the automated system is available to everyone who needs it, including the loan originator, underwriters, 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 uses many more data points than traditional credit scoring models, allowing greater flexibility in building credit profiles. Lenders can customize credit rules, accommodating a wider range of customers while still safely managing risk.