Consumers choose speed and convenience over price, even when it comes to their finances. That’s why successful lenders strive to deliver instant approvals, and 1-day funds transfers. They’re training borrowers to expect quick action with every application. Can your lending operation approve loans at warp speed, without sacrificing credit quality?
According to a 2018 PACE Insights report, borrowers say they’re frustrated with an application review process that crawls along, compared to other purchase and transactional experiences. They go on to say that their top three decision criteria when choosing a lender are speed, convenience, and reliability. Did you notice that speed is at the top of the list, and low price isn’t even on the list? This could prove to be a good challenge for the lending community.
Borrower needs and wants
When a consumer needs extra cash, or a business needs more working capital, they become credit hungry. This term is not an exaggeration. These potential borrowers can sometimes feel physical discomfort until their financial needs have been resolved, which explains why they focus on speed instead of price. They’ll close with the lender who delivers the fastest approval, not the lowest interest rate.
In our hyper-competitive marketplace, one of the most important predictors of lender performance is time-to-funding. This is the time between application submission and access to funds. Successful lenders consistently deliver approvals in hours, and funds within a few days. In fact, several digital lenders promote their products, by promising 1-day and 2-day time-to-funding in their advertising headlines.
How do lenders adjust to this new norm, where time-to-funding has been reduced to a single day? You could throw more people at the problem, but more hands won’t speed up the process. The only way to deliver account approvals at this pace is to automate your application review process with technology platforms, automated systems software, and advanced credit scoring software.
It may sound like a big investment, but these FinTech systems deliver several benefits that work to improve portfolio profitability:
- approve applications faster
- create process efficiencies
- reduce manpower
- lower operating costs
- increase the number of booked accounts
- decrease the cost per booked account
- improve risk profile
- improve portfolio yield.
Now may be a good time to invest in a cost / benefit analysis that will quantify the impact of automation technology and advanced credit scoring software on your loan portfolio.
Let’s learn from industry leaders
Earlier this year we published an article called One Day Funding – The New Norm in Digital Lending. In that article we looked at some of the industry leaders. We were especially interested in the techniques they use to deliver such quick approvals, without increasing their risk profile. It’s a group that’s worth revisiting.
Caixabank is a mainstream lender in Spain that delights their customers with pre-approved, one-click loans. The funds are credited to the account within 30 seconds after the customer accepts the offer. Mortgage companies in the US are learning from their success. 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.
LoanBuilder, an enterprise lending service owned by PayPal, uses a short screening questionnaire that the 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 your 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, and a creative review process that leverages open banking. The applicant provides personal information (name, email, and telephone number) along with access to their accounting software and business bank account. The Fundbox algorithm grades the prospect’s business performance based on positive trends for a variety of key indicators, including 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 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 an enterprise lender getting creative with their origination process is SellersFunding, previously known as Amazon Lending. They use an internal algorithm to review sales trends on the Amazon platform, and then identify third-party sellers who have the potential to scale their business with inventory financing. These sellers are invited to accept a LOC that ranges from $1,000 to $750,000.
SellersFunding 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 borrower’s monthly loan payment from their Amazon Seller Central account, before their monthly sales revenues are transferred to their business bank account.
SellersFunding is an extremely successful program with very low charge-offs. It will be interesting to see how the current restrictions might change when Amazon begins to issue 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 request supporting documents, like bank statements, when the loan amount exceeds $150,000. So any loan that’s less than $150,000 automatically converts to a no doc application. When the loan is approved the borrower receives a debit card for business purchases. This card gives them instant access to their funds for card not present transactions, even before they receive the physical plastic.
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.
Balancing speed with credit risk
The primary goal for every lender is to maximize their portfolio yield. So it’s important to understand how small changes to the origination or account management processes could potentially increase the risk profile and reduce returns.
Historically, lenders have equated decision speed with credit risk. The faster the approval, the higher the risk. That’s because they were gaining time by cutting corners. Credit decision software has changed this equation. Today’s lenders can control credit risk, without slowing down the process, by leveraging a fully managed LaaS platform.
The TurnKey Lender platform leverages traditional and non-traditional credit scoring combined with machine learning to constantly refine the credit scorecard. Our clients enjoy a faster approval process that delivers more new accounts, all accurately priced to maintain and improve portfolio yield.
Best practices for faster applications processing
Let’s look at some of the ways lenders pick up the pace when it comes to the application approval process. At TurnKey Lender we monitor best practices used by digital lenders, alternative funders, and online banks. In addition, we like to keep an eye on the e-commerce industry. This group of online sellers is on the leading edge of conversion rate optimization (CRO). And quite a few of their conversion rate techniques are applicable to the lending industry.
Attract the right prospects
Start by reviewing your prospecting strategy, search engine optimization (SEO) tactics, and advertising messages. You want to make sure you’re targeting the prospect audience that is searching for the type of loan you offer, and is likely to pass through your credit screens. Even the most sophisticated lending platform won’t be able to convert the wrong target audience.
Optimize your digital processes
Akamai Internet Observatory published a study showing the negative impact of slow technology:
- 79% of participants hesitate to complete a transaction on a lackluster website.
- 50% click to a competitor’s website when load-time exceeds 3.0 seconds.
We believe these behaviors are due to subconscious assumptions made by consumers. They translate cutting edge functionality to cutting edge cybersecurity, cutting edge products, and cutting edge customer service. On the other hand, dated functionality and slow manual processes makes them question the quality of all three.
On the positive side e-commerce websites increased their completed transactions by 7%-12% when load-time was reduced by 1.0 second.
It’s a good idea to audit your system on a regular basis. You want to make sure every individual link in the application path is optimized and cybersecure.
The digital processes checklist should include:
- traffic driving ads and blog posts
- landing pages
- website pages
- application forms
- call center systems
- onboarding processes
- account communications.
Optimize the application path
Work with user experience (UX) professionals to cut down the borrower path to the minimum number of steps, and the minimum amount of information you need to make a good credit decision. Audit the path and reduce any friction. It’s the enemy of speed. Any extraneous steps, or nice to have information fields, will slow down the process and lose good accounts to the competition. There will be plenty of opportunity to capture additional borrower information, to support upsell and cross-sell campaigns, as you nurture a relationship with your new account holder.
The application path checklist should include:
- Minimize the number of steps in the process, and the number of information fields on a form.
- Implement an omni-channel system that integrates desktop and mobile devices, so your prospect can start an application on one device and complete the application on another device.
- Include red box tactics that force applicants to complete every field before moving forward.
- Implement an auto-save function to make the process easier for an applicant who starts an application, and returns later to complete the form.
- Integrate the account 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 to provide instant access to funds. This process could save 1-2 business days, compared to the ACH clearing system.
Encourage applicants to do their part
Consumers are demanding faster approvals, but they’re willing to do their part. They search online for articles about the loan origination and underwriting process, because they want to proactively participate.
Your marketing team should post informational articles on your website blog as part of a content marketing strategy. Include topics designed to help prospects complete their application more efficiently. Start by outlining the steps in the process, and tell your readers the data they’ll need to input during each step. Include a list of all the supporting documents they’ll need to attach to the completed application form.
One of the benefits of content marketing in the digital age 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.
Automate manual identity verification processes
According to a recent article in Finovate, at least half of the origination budget gets eaten up by manual processing for identity verification and anti-money laundering programs.
An automated application review system can replace manual procedures, increasing operational efficiencies and reducing costs. TurnKey Lender comes pre-programmed with regulatory compliance rules (like GDPR) specific to your local jurisdiction, and it’s compatible with add-on regulatory technology (RegTech) software packages that automate identity verification.
Leverage lending technology platforms
Today it’s easier than ever for digital lenders, alternative funders, local banks, and credit unions to replace manual processes and outdated technology with a comprehensive, fully managed LaaS platform. These turnkey solutions use sophisticated automation software to review applications faster, and to make more accurate credit decisions. Your lending operation will originate more loans, reduce operating expenses, and increase yield by booking more profitable loans at an individual account level.
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 money transfers for account funding and monthly payments
- omni-channel customer communications options
- consolidated cross-platform 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.
In a consumer marketplace where borrowers choose speed and convenience over APR, your lending operation must be positioned to deliver instant approvals, and 1-day funds transfer.
One of the best ways to deploy an advanced automation and credit scoring system is to leverage LaaS technology. These fully managed, cloud-based lending platforms use state-of-the-art technology that’s continually upgraded. The credit decision software integrates traditional credit data, alternative credit data, and machine learning that supports your ability to approve more credit-worthy applicants, even those with thin credit files.