With consumers increasingly expecting a seamless lending experience and more non-bank digital lenders entering the market, banks must embrace digital lending technology to remain competitive. However, it must be applied strategically.
As Rob Morgan, Vice President at the American Bankers Association (ABA), wisely pointed out in a recent article in the ABA Banking Journal, “Digital lending isn’t an across-the-board pursuit for banks; it's a strategy surgically applied to specific lending areas.” The article, entitled Three Big Trends in Digital Lending and How to Get In on Them, suggests financial institutions should focus their efforts on those areas of lending that are easiest to digitize—namely, small business lending and personal loans.
These types of loans offer the greatest area for financial gain due to the fact that they are currently some of the least profitable loans for financial institutions, which typically underwrite and deliver them using the same manual processes they employ for multi-million dollar loans. These uncollateralized loans, on the other hand, rely primarily on credit reporting and deposit activity, both of which are easily and affordably digitized to help reduce the underwriting and processing cost from approximately $2,500 to as low as $250 per loan.
Financial institutions that include these loans as part of a fully automated lending platform that includes digitized loan application, digitized document uploads, digitized e-signatures and instant credit decision could stand to gain the most over the competition. According to the ABA article, banks can handle on average only 7 percent of products digitally from end to end and only 14 percent of bank customers submit applications digitally, according to a recent report by Bain & Company and SAP Value Management Center. In response, according to a new ABA Banking Journal survey, nearly three out of four bankers said they were interested in using a third-party digital platform for consumer loan origination.
According to Morgan, "Any bank's customers are going to expect the same level of service they get from Amazon or other digital services. Customer expectations are quickly shifting and being driven by nonfinancial activities. There's a need to keep up."
What should a digitized lending platform for consumer and small business include?
Financial institutions looking to digitize the lending process for these segments should offer a seamless online/mobile experience that facilitates application and loan offer in under one minute, and delivery of loan with e-sign in under five minutes.
In addition, an end-to-end digital platform should allow the institution to acquire a deposit account in addition to the loan. Doing so helps significantly manage the credit risk of small business and consumer loans, and doubles the profitability of the relationships.
When financial institutions apply digital lending technology to small business and consumer loans, they are able to strategically serve customers efficiently, profitably and with a superior experience.