In one of the last large pre-COVID real-life in-person conferences, TurnKey Lender conducted a lending industry survey. Among other insights learned, it’s evident that 76.4% of creditors are focusing their digital automation efforts on loan origination. Why is that a focus even before COVID-19 and how to be a savvy lender and put the customer experience above all else will be the focus in these 10 easy steps.
What is loan origination?
Loan origination is all the steps your operation makes prior to disbursing the loan. And, arguably, that’s the stage of the lending process that takes the most attention and effort. Because without an intelligent and easy-to-use digital origination, a business won’t make it in the socially distanced society. Loan origination cycle you use determines the selection of the borrowers, their evaluation, filtering, terms selection, and, consequently, how well your business performs.
Borrowers want to get their financing where they need it, when they need it, and how they want it. At the same time, setting up the best possible digital processes for your borrowers from the first try is no easy task, especially if at the same time you need to be extremely cautious of bad debt and unreliable clients.
Having automated lending processes in 50+ countries and pioneering the intelligent digital revolution of lending, we know the struggles business owners face most often when setting up an origination process. That’s why we put together a nine-step process to launch a truly automated digital loan origination process for your lending business. The process that will protect you and delight your borrowers.
White Paper: TurnKey Lender - End-to-End Lending Automation Software
STEP 1: SELECTING YOUR LOAN ORIGINATION AUTOMATION SYSTEM
In recent years, FinTech, specifically loan origination systems and lending automation solutions, has drastically lowered the lending industry entry barrier, making bank-grade automation accessible and affordable to SME and large lenders willing to digitize their crediting processes. So before you start putting together new business processes for your lending operation, look into what the technology is capable of doing for you.
For example, most banks still take as much as nine business days to analyze a loan application, evaluate risks, make a crediting decision, and then either disburse funds or decline the application. For any modern borrower, who’s used to getting an Uber in minutes, that’s stone age. At the same time, when switching to an automated system, like the Loan Origination System by TurnKey Lender, you’ll be able to complete the entire origination process (including disbursement) within minutes.
We apply proprietary deep neural networks and machine learning algorithms to collect relevant data and analyze it within seconds. This significantly reduces origination process time, eliminates human error, and leads to costs reduction by automating recurring tasks.
Based on our experience in North America and worldwide, the universal key steps to choosing the best loan origination and lending automation software for your business include a thorough analysis of the following:
- Define your short and long-term business needs and what you need to accomplish with this new digital system
- Consider the benefits of an all-in-one system with a modular structure
- Research cloud-based vs on-premises software to see which is best for your business needs
- Make sure to get comprehensive, integrated functionality for all parts
- Check for smart automation with machine learning and proprietary credit scoring
- Consider user-friendliness for your customers
- Make sure there are country-specific editions of the platform
- Review the ease of business logic customization
- Make sure the time to market is fast and it is easy to deploy and easy to learn
- Review the providers’ proven track record with businesses similar to your own
Another reason, why the choice of the loan origination system is a big one, is because migrating from the wrong one will take a ton of time and resources. If you are looking to learn more on this, you can read our in-depth guide devoted to choosing a lending automation solution for your business.
And if you look beyond origination, a unified lending management solution would include loan origination as well as servicing, collection, reporting, integrations, and more, so once you’re done reading that article, there is a free white paper at the end with further best practices on choosing the best digital loan origination system for your business.
Plus, we’ve recently published a brand-new article devoted specifically to choosing the right origination software provider for your business. Feel free to check it out here and let us know if you have any additional questions:
STEP 2: LOAN ORIGINATION PROCESS REVIEW
Having researched and selected the loan origination system, you’ll see that based on its capabilities you have a pretty clear idea of the origination process you can implement with it. Now you need to put it on paper and analyze your business needs, borrower’s preferred channels, risks, and unique selling propositions. Not to mention, the origination process of your local competitors and the international market’s top performers. Because in the global world, if some technology is accessible to one company, chances are, it can be replicated and improved upon, no matter where you work.
And while the business model and logic are paramount, it’s extremely important to consult with a local regulations specialist to go through the ins-and-outs of the state’s requirements and avoid stepping on some regulatory land mine.
Once the process is set from the compliance standpoint, review it with your team, and once again go over the system you chose with your staff. You want input from people on different stages of your lending process involved in the discussion because a hands-on originator will be able to provide you with easy-to-miss details and you will come to more well-rounded decisions.
STEP 3: LOAN ORIGINATION SOLUTION CONFIGURATION
Depending on the loan origination solution you choose, the time-to-market and customization options will differ. An advanced FinTech may be ready-to-use out of the box and deployed within days, but just as well you can get tangled in a confusing system that would take you and your team months before you actually start applying it to your loan origination process.
With the right software provider, you won’t need to do much other than control the quality and completeness of the customization and decide when you want to deploy. If you’re a small- to mid-size retailer, alternative lender, or just looking to offer in-house financing, chances are your lending automation needs will be more or less typical for the industry.
If that’s the case, the completely operational end-to-end solution by TurnKey Lender can be deployed for your business within a day of signing the contract. If you want to customize the solution it can take a little more time, however, Turnkey Lender has the most robust solution with the fastest time-to-market. You get a flexible and scalable platform that our team can adjust to any of your business needs. The time-to-market will differ by packages, so you can choose which fits your business best:
- Separate configurable modules for loan origination, servicing, underwriting, collection, and more
- A ready-to-use boxed solution for end-to-end automation
- An Enterprise solution to address your unique needs and meet the requirements of a large-scale institution
You can email our team at [email protected] if you’d like to discuss your specific project and see what we can do for you.
STEP 4: THE ROLE OF PREQUALIFICATION IN THE DIGITAL LENDING PROCESS
The first point of contact lenders get with potential borrowers is prequalification. Once your digital loan origination solution is up-and-running and you have received a lead you need to request the personal information you need for AML and KYC compliance or analyze the info the lead submitted from a form on your website.
So in order for the prequalification to work smoothly, the loan origination software needs to have a flexible loan application form settings to collect and process the data that will actually help make an informed credit decision. Some of the data points you may need to collect include:
- Legal name (including maiden or middle names if applicable)
- Permanent address
- Telephone number and email
- Date and place of birth
- Sex, marital status
- Position held and/or name of employer
- An official personal identification number or other unique identifier contained in an official document with a photo (e.g. passport, identification card, residence permit, social security records, driving license)
- Type of bank account and income sources
All that, including the signature, can be collected without ever visiting a branch with an e-signature service integration.
Check out an in-depth article about borrower identification in digital lending here.
STEP 5: ONLINE APPLICATION AND APPLICATION PROCESSING
To transition to an e-lending crediting model you may want to consider to keep both doors open to your customers at first: let them fill out a paper form (you can have your employees type the info into the solution directly) and also give them the option to apply online without even coming to the company or branch.
Based on the extensive experience TurnKey Lender’s customers have with this approach, it’s the optimal way that doesn’t create stress for the more traditional customers and meets the needs of customers who prefer to do things digitally. The only part that really matters here is that you collect the data needed to pass to processing and underwriting.
With the right loan origination solution, you won’t have trouble processing many more loans than before. The problem is that not all loan origination solutions apply intelligent borrower evaluation approaches for thorough analysis of borrower evaluation and risk management. This is why the provider you select is of critical importance.
TurnKey Lender uses deep neural networks to get as much insight from the customer data as possible and help you approve more of the right loans in a matter of seconds.
STEP 6: UNDERWRITING
Once data collection and application processing are taken care of, you can get to the fun part. And by fun, we mean the hardest thing lenders deal with in the world of digital lending – analyzing the borrower data, and making the right credit decision based on it. With the traditional borrower evaluation approaches becoming obsolete, lenders need to strongly consider fully digital, automated underwriting approaches for gauging risks quickly and accurately.
Usually, underwriting consists of multiple levels of borrower’s data analysis, risk scoring, and evaluations. To improve credit decisioning accuracy, you can apply several scoring models to every application. With an advanced FinTech like TurnKey Lender, this doesn’t lead to any added expenses and comes as built-in functionality. In a nutshell, you provide the system with your own set of decision rules and adjust the scorecard setting to correctly evaluate the data points you receive.
TurnKey Lender provides you with a system powered by deep neural networks with self-learning scoring models for both traditional and alternative evaluation approaches and data sources. Working with the client data, the system learns to use prediction, classification, clustering, and association in application processing. For safety purposes, the system doesn’t just use the data client is providing but also pulls the available information from the databases it’s synchronized with (like the credit bureaus). All the data is processed by the TurnKey Lender’s algorithms and is then presented in the form of a risk evaluation.
Even though the credit decisioning that comes built-in with TurnKey Lender presents an excellent usage of these advanced technologies on its own, the team didn’t stop there. The algorithms and models are polished and upgraded to take into account more factors and learn faster with each new release. The experience the team got working with clients from all over the world led us to create a new, standalone, product called TurnKey Lender Psychometrics.
It’s an app that uses the original AI-powered decisioning engine as a starting point and enhances it through a psychological test that was put together by experienced psychologists, lending specialists, and in-house AI engineers. The test, combined with the deep neural networks which analyze its results, allows to accurately evaluate loan risks and potential borrowers even in cases when there’s no access to their credit history or even bank accounts.
The completion of a test by a potential borrower and risk evaluation can take as little as 6 minutes. As a result, the lender gets a risk score and they can make an informed loan decision based on deep analysis of the user’s psychological profile and behavior rather than lose business or run high risks.
That’s just one of the examples of how alternative credit scoring can be used to improve decisioning accuracy. The vast majority of our clients are fully satisfied with the built-in scoring models and decision rules, but should your business need unique underwriting, we can easily tailor the platform to your technical requirements.
STEP 7: INTELLIGENT CREDIT DECISIONING
The key benefit of lending business automation, other than convenience, is the data you’re able you aggregate, process, analyze, and get insights from. Big data and AI go hand-in-hand since it takes self-learning algorithms to get through the tangles of data points and make sense of it.
With the rise of big data, credit decisioning gets a lot more granular and accurate. So the lack of data for analysis is not the problem. The hard part is to get a solution sophisticated enough to get all the needed insights from this data in a matter of seconds.
TurnKey Lender applies artificial intelligence to carry out risk evaluation and borrower evaluation for your business. You can customize the credit scorecard and watch your rules take seconds to be executed in a borrower’s evaluation. TurnKey Lender’s proprietary algorithms study the applications which are more successful and tweak the evaluation algorithms to grant you even higher decision accuracy.
A human would take days to run all the checks on this data and a traditional machine isn’t much faster, but proprietary self-learning machine learning algorithms created by TurnKey Lender does this in seconds. The interest rate assigned to each application depends on the risk factors connected to each borrower, taking into account not just data about their past but understanding their psychological portrait and likelihood to pay back what they owe.
STEP 8: QUALITY CONTROL
Right now is the new industrial revolution and the businesses that embrace automation will stay competitive in the world to come. The good news is that to scale a lending operation in the digital age you don’t need dozens of local branches with rent and staff on the payroll in all of them. Lending technology in its current state is perfectly capable of automating the vast majority of lending business’ operations, freeing up human resources and drastically improving speed and performance.
And even though you may not feel comfortable delegating credit decisions and risk evaluation to machines at first, what you may want to do is do it semi-automatically at first, then switch to checking only the declined application and when you see that the errors evaporated, simply make ad-hoc checks from time to time.
The goal of the lender at this stage of loan origination is to involve as little human resources as possible, first and foremost, cause it proves incomparable in environments where instant analysis of millions of data points is required.
An important thing to keep in mind is that on the stage of quality control, you take on responsibility for each borrower in the eyes of the regulators. So there should be people who analyze the applications from time to time, but it’s extremely important that the process is at least semi-automatic, because the time to funding is most important to your success in today’s and tomorrow’s markets.
STEP 9: FUNDS DISBURSEMENT
In this theoretical digital lending business flow, we’ve already collected the borrower’s data, conducted all the origination activities, and had the application approved by an underwriter. Once you’ve made it this far, disbursement is the easy part.
Any digital lending automation system worth its salt integrates with payment software and will automatically send the money to the borrower once all the checks on your end are completed and the loan is approved for disbursement. The same goes for debt collection.
From there, a good loan can basically live on its own with the borrower making scheduled automatic repayments, fees, and interest, as well as collecting all the data that will, later on, help you prove you did your due diligence.
STEP 10: TRACKING AND REPORTING
Once the funds are out of the lender’s pocket, loan origination ends. However, it is of utmost importance that all the data and borrower information is formatted, stored safely, and passed into a synchronized reporting software. This will help with regulatory compliance, cut operational costs, help find inefficiencies, and eliminate human error. In order to achieve this, the tracking and reporting modules should be fully integrated into the loan origination software.
If you don’t hit the mark during the loan origination, a good borrower isn’t likely to come back but the bad ones will come in mass. Credit scoring, automation, evaluation, integrations all take time and resources. But with the technology we have today, the software does all the heavy lifting. So if you were considering launching a digital lending operation, there’s really nothing stopping you. Here are all the steps in an infographic, just in case:
And don’t hesitate to contact our team with any questions or requests!
TurnKey Lender provides lenders with bank-grade technology that automates every step of the lending process at a fraction of the price and time-to-market. The loan origination module of the TurnKey Lender solution covers every one of the 10 steps listed above and can also be used as a part of the end-to-end solution. Let’s chat.