One Day Funding – The New Norm in Digital Lending (How to Adjust)
Consumers don’t love technology. They love the speed and convenience that technology delivers. Digital lenders who capture the lion’s share of new loans in today’s fiercely competitive marketplace, do so by minimizing a metric called time-to-funding. They regularly grant access-to-funds within 24 hours after the applicant clicks the submit button. Is your lending infrastructure up to the challenge?
A few weeks ago we published an article on millennial borrowers and how they choose a lender. This report concluded that the top three decision criteria are speed, convenience, and reliability.
Our perspective has been validated by the 2018 PACE Insights report, an annual survey published by FIS Global. This year’s study reveals three additional insights affecting the lending industry:
- 75% of millennials expect to encounter at least one life event in the next few years that will negatively impact their financial situation.
- 66% intend to borrow from a non-traditional lender to pay for the emergency.
- Their single biggest pain point is slow loan processing.
As lending professionals, we live and work in a time-sensitive environment where you often win by delivering the fastest approval, not the lowest interest rate. That’s why time-to-funding is such an important performance metric. It measures the number of days, or even minutes, between application submission and access to funds. Several online lenders already include it as a key benefit in their marketing messages. Ondeck and Credibly promote a 2-day time-to-funding. LoanBuilder by PayPal and Fundbox promote a 1-day time-to-funding. And Kabbage just launched a television advertising campaign in the US touting a 10-minute time-to-funding.
These time pressures can be overwhelming for lenders who still rely on outdated technology, but there’s some good news in this scenario. The automation technologies that shorten approval time – also create substantial systems efficiencies that lower operational costs. You increase the number of booked loans and decrease the cost-per-booked-loan in one swift stroke.
The world spins faster, and faster
A few years ago automated underwriting and online-only loans were considered cutting edge. Today mainstream lenders like Caixabank in Spain surprise and delight their customers with pre-approved, one-click loans. The 30-second funds’ transfer puts the icing on the cake. Mortgage companies in the US are learning from these success stories. Some are already delivering real-time home loan approvals, using automation fueled by AI and computer vision technologies. In some cases, they have achieved a 100% touchless system with zero manual review before the mortgage gets funded.
These marketplace disruptors don’t plan to rest on their laurels any time soon. Voice-only systems for loan applications and radio wave tap-technology for monthly loan payments are already on the horizon.
Instant approvals, tricks of the trade
Let’s take a closer look at how this new breed of lenders delivers such quick approvals, without taking on undue credit risk. It starts with a creative mindset. They think like a consumer service company, instead of a traditional business banker.
LoanBuilder uses a short screening questionnaire that the business borrower can complete in 5 minutes. Approved questionnaires trigger a full-form loan application, but the pre-populated fields make the submission process fast and easy. Support documentation is kept to a minimum. Sometimes it’s as easy as uploading the last 4 months of business bank statements. That’s it. Approved borrowers return an online contract with a digital signature, and get their funds the next business day.
Fundbox uses a proprietary software system with a creative review process. The applicant provides their name, email, and telephone number along with access to their accounting software and business bank account. The Fundbox software grades their business performance based on positive trends for product sales, cash flow, accounts payable and accounts receivable management. The Fundbox system can approve an account, award an appropriate line of credit (LOC), and assign accurate pricing within minutes. The LOC, used as a loan delivery vehicle, provides two benefits compared to a lump sum loan. It delights the borrower with instant access to their funds. And it controls credit risk. The LOC allows Fundbox to monitor borrower behavior, and implement safety measures when an account starts trending in a negative direction.
Another great example of a business lender getting creative with their origination process is Amazon Lending. They use an internal algorithm to review sales trends, and identify Amazon sellers that could scale their business with inventory financing. Sellers flagged for strong growth potential are invited to accept a LOC that ranges from $1,000 to $750,000.
Amazon uses three techniques to control risk on these pre-approved loans:
- They only extend financing to sellers with a proven track record on the Amazon platform.
- They restrict the way the funds can be used. Borrowers are allowed to use the funds only for making payments to wholesale product suppliers.
- They create an autopay system where the Amazon platform automatically deducts the seller’s monthly loan payment from their Seller Central account, before their monthly sales revenues are transferred to their business bank account.
Amazon Lending is an extremely successful program with very low charge-offs. It will be interesting to see how the current restrictions might change when Amazon starts issuing loans through their new partnership with Bank of America Merrill Lynch.
Kabbage uses many of the automation techniques already described, and they bring two new ideas to the plate. They only require manual review with supporting documents, like bank statements, when the loan amount exceeds $200,000. So any loan that’s less than $200,000 automatically converts to a fully automated, no doc application. That’s how they achieve their 10-minute funding objective. When the LOC is approved the borrower downloads a secure app for instant access to their funds. Kabbage clients can withdraw funds as needed via their computer, their mobile app, or by swiping their debit card.
The downside of speedy approvals
There are lots of double-edged swords in life, and speed-in-lending is one of them. A faster approval process delivers more new accounts. However, that same speed makes it harder to distinguish the good borrowers from the bad borrowers, and assign accurate pricing. You could overprice an applicant who has stellar credit, losing the loan to another lender. Or you could underprice a high-risk applicant who has thin credit, losing portfolio profits to bad debt charge-offs.
Another issue is the fact that consumers may associate fast approvals with short-term, emergency loans like payday products. It’s important to position your brand as a premier provider who uses the latest technology to cater to consumer needs and wants. In this way, you differentiate your brand from predatory lenders that use speed to target credit hungry consumers with onerous interest rates and fees.
Today’s lenders need to up their game with faster approvals, but it can be difficult to balance speed and accurate pricing without compromising on both sides of the scale. A win-win solution leverages a fully managed LaaS platform that gives you the best of both worlds – fast approvals and accurate pricing.
Lender best practices
Let’s take a look at lender best practices that can speed up the approval process. We won’t be shy about swiping good ideas from ecommerce experts. They use a number of techniques that alternative lenders can and should embrace in order to differentiate their brand in the lending marketplace.
Optimize website and cybersecurity
A recent article published by Hubspot includes statistics from Akamai Internet Observatory that demonstrate how very small shifts can make a big difference:
- 47% of consumers expect a website to load in under 2.0 seconds.
- 50% will move on to a competitor’s website when page load exceeds 3.0 seconds.
- Sales revenue can be increased by 7% to 12% when load time is decreased by just 1.0 second.
These figures explain why conversion rate optimization (CRO) is the hottest topic in ecommerce, and why it should be top-of-mind for every digital lending organization as well. The beauty of CRO is that you increase sales and profits, without increasing the marketing budget or the number of website visitors.
There’s another important ecommerce insight related to website performance. 79% of visitors will hesitate to complete a transaction on a lackluster website. We believe the technology sends a subliminal message. Cutting edge functionality conveys cutting edge security, cutting edge products, and cutting edge customer service. Dated technology makes the visitor second guess the quality of all three.
The devil’s in the details. So make sure every individual link in your sales funnel chain is fully optimized and cyber secure, including: traffic driving ads, landing pages, website pages, application forms, and onboarding communications. It might sound so obvious it’s silly, but quality check link functionality on a regular basis. It would be disastrous to lose two hours’ worth of applications, because a “submit” button was sticking. On a final note review your ad targeting techniques and search engine optimization (SEO) tactics to make sure you’re placing your brand in front of prospects who are searching for the type of loan you offer. The most sophisticated technology in the world can’t convert the wrong target audience.
Optimize user experience
Work with user experience (UX) professionals to ensure your application process is culled down only to the few critical steps required to make a good credit decision. Make the term friction part of your vocabulary. It’s the enemy of speed, so take your team on an anti-friction campaign. Any extraneous steps, or nice to have information fields, will slow down the process and lose good accounts to the competition.
These are just a few ways your lending organization can optimize UX:
- Minimize the number of steps in the process, and the number of information fields on a form.
- Activate a pop-up when your visitor starts to navigate off the website. Offer to answer any questions that will help them complete their application.
- Use a contact capture system to get their email address. Schedule an automated series of messages to stay in touch and close the sale over time.
- Include redbox tactics that force applicants to complete every field before moving forward.
- Implement app abandon tactics to reconnect with applicants who start, but don’t submit, their application. And make sure their work is automatically saved without any action on their part.
- Send follow-up messages to app abandons to encourage them to complete their submission. Start with an invitation to answer any questions, then escalate with discount offers or rebates to incent a completed application. Send reminders with expiration dates to add urgency to the message.
- Integrate the application review and approval process with your onboarding process for a seamless borrower experience.
- Incorporate a debit card into your product features. Then use the debit card payment system for an instant funds transfer, instead of the ACH system which could take an additional 1-2 business days.
Involve your borrowers in the process
Consumers are demanding faster approvals, but they’re willing to do their part. One of the top Google searches is, “how do I make my loan move faster”. Borrowers want to understand how loan origination and underwriting works, so they can proactively participate in a speed dating process.
Incorporate content marketing strategies into your overall marketing mix. Post informational articles on your website blog. These articles should include top SEO keywords, along with valuable borrower tips and digital tools. A simple tool could be a checklist showing all the support documents they’ll need to attach to their application. A more complex tool could be a digital calculator to determine a comfortable monthly mortgage payment based on household income, sales price, down payment, interest rate, term of loan, property taxes, homeowner insurance, and utilities.
One of the benefits of content marketing is that the information seeker can move from the blog article to the loan application with one click. The article content has already established your credibility, which increases the likelihood that they’ll complete your loan application instead of checking out the competition.
Don’t let regulatory compliance programs slow you down
Identity verification programs like KYC and CIP can slow your time-to-funding metric to a crawl. Finovate recently reported that, “…the average cost for a digital lender to acquire a new loan is $300 with half of this expense going to compliance costs for manual identity verification and anti-money laundering.”
An automated application review system can solve the manual processing problem efficiently and cost-effectively. The TurnKey Lender platform comes pre-programmed with regulatory compliance rules specific to your local jurisdiction, and it’s compatible with add-on regulatory technology (RegTech) software packages that automate identity verification procedures.
Increase decision speed with automation technology
Sarah Wheeler, the Managing Editor of HousingWire, said it best, “With increasing compliance costs and more intense competition in the marketplace, lenders are feeling the pressure to minimize their loan processing costs to ensure growth and profitability. As a result, lenders are recognizing the need to fully automate their business, in order to significantly reduce the manual work and expense of processing and approving a loan.”
Today it’s easier than ever for alternative lenders, local banks and credit unions to replace obsolete technology with a comprehensive, fully managed LaaS platform. These turnkey solutions use sophisticated automation software to review applications faster and with better credit decision accuracy. Your lending operation will book more loans, book more profitable loans at an individual account level, and reduce operating expenses. It’s the trifecta of portfolio profitability.
A superior LaaS program will include these service features:
- automated origination and account servicing processes;
- credit review via traditional bureau data, alternative bureau data, and proprietary scoring models;
- leading edge cybersecurity;
- regulatory compliant processes;
- digital transfers for account funding and monthly payments;
- omni-channel customer communications options;
- consolidated cross-platform monthly reports.
The operating platform will include advanced functionality:
- cloud-based system (easy to deploy, easy for your team to master)
- rules-based processes customizable for individual lender requirements
- outstanding technical and customer service support.
Every person who submits an application, regardless of whether it’s a business or consumer loan, needs money now. That’s why the process causes so much stress and anxiety. In fact, consumers often compare it to a trip to the dentist. As lending professionals, we must make it our business to deliver a brand experience that feels more like a regular cleaning than a root canal. A fast, easy approval process is your best first step.
At TurnKey Lender we take pride in partnering with so many lenders worldwide – and supporting their organization with the most intelligent, end-to-end lending automation software on the market.