Faster decisions, lower processing costs and a higher revenue per loan – it’s no surprise that digital lending is attracting so much attention, but many financial services firms are not there yet.
The traditional process of getting a loan can be quite tortuous. You have to apply, visit the bank and sit as they wade through your financial details. It can be stressful, hard work and time consuming, but what if you could take that entire process and stick it into the digital realm? Customers love the idea of digital lending and so, increasingly, do financial institutions.
But putting digital lending into practice represents a considerable technological challenge.
What is digital lending?
Digital lending involves managing and processing loans online. It can include anything from a simple online loan application to a fully immersed process in which digital technology handles every part of the process from application to, document management, electronic signatures, credit analysis, decision making, pricing, and ongoing administration.
So-called digital challenger banks are already one step ahead in offering digital loans and customers not only want it, they expect it. Despite this demand, traditional banks and financial institutions are still lagging behind. Studies suggest traditional banking institutions are playing catch-up in digital innovation against their newer, smaller and more tech-savvy rivals.
The ABA’s state of digital banking found that only a quarter of those surveyed were taking advantage of digital lending origination for small business loans while 11% were using it for commercial lending. However, digital channels are already surging ahead and offering digital lending for a range of products including mortgages and other loans. Other financial services firms, auto lenders, credit unions and other non bank financial services can also benefit from this option, but are being slower to adapt than they could be.
There are many reasons why these players are falling behind. Regulatory compliance can hold organizations back as well as the risks or uncertainties involved in turning to technologies which may appear unproven. Older companies will also have a large amount of existing infrastructure which can make it difficult to integrate new systems. Nevertheless, this is the future and they need to get on board to stay relevant. Not only are customers calling for it, but competitors are offering it. Most importantly of all, digital lending can offer all sorts of benefits.
Benefits of Digital Lending
The biggest attraction is the time to decision making. McKinsey states that the average time to decision for small business loans is between three and five weeks. The average time to cash is almost three months. This waiting period, for a small business that needs a cash injection in a hurry, is a problem. At the same time, lenders will also want to reduce that time gap. Not only will it be cheaper, but it will increase the number of loans they can make, leading to increased profits.
Other customers also want faster and more accurate decisions on their applications. Mortgage owners, for example, could benefit from digital analysis which not only gives them a quicker answer, but also develops a more tailored package to their needs. Insurance firms can also use digital lending to streamline processes, save money and deliver more personalized policies. Financial services can screen clients and deliver more effective, tailored and prompt real-time advice.
The difference can be substantial. Digital lending can reduce time to cash to 24 hours. Analysis from McKinsey calculates that an institution with a balance sheet of $250 bn could capture $230 mn in annual profits. Half of these revenues are due to increased efficiency and time gains, while the rest is due to increased revenue.
By automating the verification processes, digital lending eliminates the time-consuming task of manual verification. Regulations have increased the compliance requirements for lenders which increased the amount of time required to manually check documents in hard copy or PDF form. Automating all these processes increases efficiency and reduces the overall costs associated with processing loan applications. Systems can automatically access and verify data from external sources, notify customers or loan officers of missing information in real time, and digitally capture documents from any device. Customers can be given the chance to issue e-signatures to expedite the processing of their applications.
There is a wide range of custom-built solutions available to use. These solutions provide a complete end to end solution putting all the functionality in one place. Using the power of the cloud, they can make it easier to connect all participants including the borrower, broker, and the bank. Installation and integration are also cheaper and quicker, allowing banks to achieve a more seamless integration of digital lending software into their operations. This is much faster and cheaper than building your own point of sale finance system from scratch. Building a system can take years and may be fraught with difficulties. A custom-built system would allow an institution to build a solution that fits their specific needs, but this is not always a reasonable option. An out of the box product is ready to go almost right away but it can be restrictive in terms of flexibility and having to employ a cloud operator will involve sharing highly sensitive data with a third party. In this instance, you are surrendering control but retaining responsibility. In an age where cybercrime is a major concern, you need to be absolutely certain that the cloud provider you choose as the highest level of security.
The Future of Digital Lending
Traditional financial services firms have often looked at the rise of digital banking and digital lending with a bit of caution. To them, this looks and feels like a threat as an increasing number of Fintech/Insurtech companies embrace digital technologies which they can’t access. However, there is nothing stopping traditional banks from adopting fintech to deliver these services themselves.
Services can come in many areas including:
- Digital loan orientation: Automating the initial processing of loans for lenders and borrowers.
- Self service loans: Digital servicing solutions allow individuals to handle much of the legwork. Not only does this make it more convenient for them, but it also streamlines the process for lenders.
- Automated loan servicing solutions: End to end services covering every stage of the loan process.
Better still, they can use that technology to deliver benefits which are uniquely suited to their own strengths and their established customer relationships. The data produced by moving into the digital realm can deliver all sorts of advantages including making it easier to deliver targeted sales and lending services to customers.
Even so, there is still resistance. Much of this comes down to unfamiliarity with the technology. Some comes from fears about security and regulation, but it also stems from difficulties with integrating new systems. Financial services companies have sizable legacy systems which can take an enormous amount of disentangling. The cost and logistics of this task are enough to deter even the most forward thinking of organisations. System integration solutions can be enormously valuable in helping a firm unblock on of the most stubborn blockages on innovation and unlocking an exciting future.
That future is moving quickly. AI is developing rapidly and it will soon be integral to the process. It can deliver enhanced services in the analysis of loans, pricing and decision making which will play an increasingly important role in the delivery of lending services in the future. Those which make the move to digital lending can capitalize on enormous benefits to their business while those who do not will be left struggling to keep pace.
Market Research Team, RapidValue
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