Digital Lending ROI: Positive Return on Technology Investment

Many lenders, especially credit unions and small local banks, lag behind when it comes to financial technology. It’s a short-sighted business strategy. Cost-benefit analysis shows a positive ROI when digital lending technology delivers a borrower-centric experience and drives operational efficiencies. Digital lenders earn incremental revenue from new accounts (especially Millennials who have a higher lifetime value) and cost savings from process efficiencies.

This technology lag represents a wide gap between lenders and today’s consumer. According to a Pew Research Center study (2018), consumers of all ages, income, and ethnicity are embracing technology at an accelerated rate. 95% own some type of mobile device. 77% carry their smartphone everywhere they go. And 22% are smartphone dependent, meaning their smartphone is their only resource for communication and Internet access. Mobile Ecosystem Forum (2017) released a report that shows 61% of consumers use their smartphone for some type of banking activity on a regular basis. This figure jumps to 83% (men) and 73% (women) when the survey question asks how often they conduct their banking from any type of mobile device.

Statistics on SMBs (small to mid-size businesses) show a similar pattern of behavior. The top 50 global banks own 68% of the SMB market, and only 13% of these companies apply for loans with a local bank or credit union. The primary reason for this ongoing dependence on big banks is the misperception that they’ll get more sophisticated digital and online banking services. It’s a lost opportunity for community banks because research shows this group has a strong preference for local resources.

Let’s Get the Facts Straight

There are two misconceptions impacting the lending industry in a negative way.

Misconception #1: Consumers believe big banks are light years ahead of community banks when it comes to technology-driven ease and convenience.

Fact: Big banks may be further out on the technology curve than local banks and credit unions, but they’re still way behind digital lenders. It looks like big banks are doing a much better job than community banks when it comes to promoting the online products and services they do offer.

Misconception #2: Lenders believe technology upgrades require a large financial investment along with a multi-year implementation schedule.

Fact: There are a number of SaaS (software-as-a-service) platforms created specifically for lenders. They’re known as lending-as-a-service platforms or LaaS for short. These platforms are customized for each subscriber to reflect their brand as well as their products and services. LaaS platforms are hosted in the cloud, so all maintenance and upgrades are performed by the provider’s developers. It’s a turnkey, fully managed service at a low cost, and lenders retain full ownership and control over their customer data.

Recently we published a case study on Meritrust Credit Union. The results speak volumes about the value of an online lending system. They were able to increase the number of booked loans, increase the average dollar amount per loan, and cut funding times dramatically. To put it in a soundbite – their digital platform substantially improved profitability by increasing revenue and decreasing costs.

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Improve Portfolio Profits

Fintech platforms improve portfolio profitability by:

• increasing the number of accounts booked
• increasing the longevity and lifetime value of each account
• improving credit quality.

Lenders who use digital technology can increase the number of accounts booked in two ways. First, they expand their prospect pool to include younger, more tech-savvy Millennials. Digital loans are more attractive to this group. Plus the automated underwriting system closes more loans because it closes loans faster. Remember these borrowers tend to submit multiple online applications, and their business often goes to the first approval they receive. Second, technology-driven credit scoring approves many applicants that traditional lenders reject. Digital lenders use alternative scoring methodologies to enhance traditional credit bureau scores, which allows them to approve applicants with thin credit files.

Digital lenders increase longevity and lifetime value of new borrowers in two ways. First, by attracting younger applicants who will remain a bank customer for a longer period of time. And second, by using technology to collect and analyze data on customer behavior in real-time. These insights provide lenders with more opportunities to upsell and cross-sell products like pre-approved instant loans to current customers. Retention experts tell us that every link between the bank and borrower increases loyalty and lifetime value. It’s the first step towards converting a borrower to a brand advocate who recommends you to family and friends and posts positive reviews on social media.

We mentioned earlier that alternative scoring models can increase the number of new accounts. These models do double duty. They provide more accurate applicant profiles, which drives more precise account pricing, which increases portfolio yield.

Decrease Operational Costs

Fintech platforms decrease costs by reducing process inefficiencies. They:

• automate application submission and review
• replace paper documents and branch visits with secure online exchanges
• use omnichannel communications options to accelerate application response time.

Remember our Meritrust Credit Union case study. When they automated the lending process they tripled their productivity. Their operational analysis group reported that the new system effectively eliminated 120 clicks compared to the older application procedures.

The traditional review process requires a large number of paper documents, and almost every application needs at least a few revisions after the first pass. This is a time-consuming process with plenty of human error. Fintech platforms with pre-populated forms provide a faster, more secure transfer of information with fewer errors. A process that used to take weeks, can now be completed in a few days. Or even the same day for pre-approved offers to existing customers.

Applicant response time can be shortened from 1-2 days to an instant exchange when consumers are able to reply via a mobile device, instead of coming into the branch during banking hours.

Digital Lending Will Become a Commodity

Today’s consumer believes there’s no difference between bank brands. They see financial services as a commodity-driven marketplace where price becomes their primary decision point.

As more lenders begin to deploy technology-driven products and services, borrowers will begin to see digital lending as a commodity as well. So it’s important to develop a digital lending strategy that positions your operation for the future. Don’t make the mistake of transferring old processes to an online delivery vehicle without careful analysis. Now is a great time to review the end-to-end user experience. Make sure it serves your borrowers’ needs, and in a way that’s operationally efficient. This thoughtful exercise will serve as the basis for a long-term, online lending strategy that delivers your desired business goals, and differentiates your brand from tomorrow’s competition.

A fast, efficient, cost-effective implementation strategy is to leverage a fully managed Lending-as-a-Service platform like TurnKey Lender.

The TurnKey Lender award-winning fintech platform delivers four key advantages:

• Deploys quickly and easily from our secure, cloud-based system. And gets your team up-to-speed with intuitive process flows, user-friendly training modules, and 24/7 support.
• Uses automation to increase processing efficiency and reduce human error.
• Uses alternative scoring methodologies and proprietary credit scoring algorithms (continually optimized with machine learning) to improve credit decisions.
• Leverages our regulatory compliance expertise to ensure that all platform processes remain compliant as new rules are published by regulatory agencies.