BSG Financial Group recently conducted an educational webinar called Digital Lending for Financial Institutions. It was our most popular session to-date, so we thought it would be helpful to share some of the questions attendees asked as well as our answers.
We will feature several more questions from this popular webinar in a series of blog posts to follow. If you have questions of your own regarding Digital Lending, feel free to submit them in the Comments box at the end of this post and we will answer them right away.What loss ratios can we expect with online lending?
We often get this question, and the answer is: if you’re using the same criteria for online lending as you do in-branch, the losses are going to be the same. The MinuteLender™ system for business and individuals provides the loan delivery platform, but it uses your institution’s guidelines for underwriting rules.
Our system provides over 30 years of sound credit underwriting history—all documented in governance, process and validation—with losses projected at 4% over the period. However, we also have access to account holder deposits and cash flow through checking account data, which further reduces loan loss risk. As a result, we project our loss ratios are right around 3% to be conservative.
Now, we understand that many small business lenders have a 30 bps objective; however, underwriting to this loss ratio on a smaller loan of, say, $30,000 is simply unprofitable. With a prime or prime plus one rate, the underwriting, set up, servicing and renewal costs (about $1,500-$2,000 a year) are as high as the revenue.
Therefore, the rationale for these smaller dollar loans is: why not take a slightly higher loss (2% to 3% risk-adjusted) and charge a slightly higher rate (we typically average a 9% interest rate)? Many businesses and individuals looking online for a loan want to pay down a credit card or pay off a higher priced debt, so the rates are attractive, especially compared to credit card rates. The loans are also delivered immediately, which is what they want.
Our system provides full model governance, documentation with loss ratios and back testing; but it’s all based on your underwriting, your management, your choices and your guidance. We just provide the technology that delivers it.
Is it secure to deliver this lending technology in the cloud?
Cloud technology today allows consumers and small businesses to apply for a loan from any location and device quickly and easily. All data security and authentication compliance is provided with SSAE16 and SOC2/Type2 documentation. However, even if the cloud is compromised your institution is safe, because no critical customer identifying information, such as account, social security or tax ID numbers, is stored there.
Our system stores only account holder proxy information in the cloud. This information allows account holders who apply for an online loan to identify themselves with only a few pieces of information, authorize a credit report and get approval of a loan in seconds. The process is the exact same as if your institution gathered the information manually. Once approved, the customer e-signs the required documents and disclosures and provides electronic information to the institution to set up the loan.
The system manages compliance consistently; generates no paper; and stores full documentation on the institution’s core… never outside your firewall. Automating lending through the cloud in this way allows full online and mobile delivery of loans to drive efficiency and new revenue.