In a worldwide rush for greater efficiency in financial transactions, automated underwriting stands out for its breadth of application and for acting as a catalyst for increasing competition between online and traditional lenders. Though we’re focused here on its role in consumer and middle-market B2B lending, its impact has been felt in financial segments as diverse as mortgage lending, bond issues, and insurance policies, according to Investopedia.
Functionally, automated underwriting is an algorithm-driven process for evaluating the risk of specific transactions. Effectively, it takes humans out of the loop. The result? Decisions, based on the lender’s customizable guidelines, that are more accurate, and rendered much faster than the “analog” alternative.
Why underwriting automation isn’t just for banks
Automated underwriting has spread from credit cards and mortgages in the 1990s to banks and other traditional lenders as the internet took off. “Now a host of retailers, equipment suppliers, and medical practices” encompassing not just traditional lending but also “other credit scenarios such as invoice factoring, leasing, and even pawn-shop transactions employ automated underwriting,” says Elena Ionenko, co-founder and operations chief for TurnKey Lender, a pioneer in the space. “It extends to any financial transaction aided by an assessment of a would-be borrower’s ability to repay the loan amount plus interest — and that’s true whether it’s a consumer buying a lawnmower or a civil engineering firm looking to deploy a half-dozen commercial drones for surveying inaccessible terrain.”
So what, past the availability of the technology, is behind this new surge in uptake? In a word, economics. A lender’s ability to gauge a loan applicant’s creditworthiness will increase the quality and scale of its loan portfolio and increase customer satisfaction. In an increasingly digital world, lenders mired in paper-based vetting procedures operate at a competitive disadvantage that is virtually impossible to overcome.
Benefits of Automating Commercial Underwriting
To show how this economic advantage plays out, here are 10 of the most important ways automated underwriting makes lending more attractive, efficient, and compliant.
- Enhanced decision making: Automated underwriting isn’t just about faster decisions. It’s also more accurate than its spreadsheet-based forebears, which is, in turn, fairer to everyone involved. After all, while people are notorious for having bad days and succumbing to stress from time to time, algorithms never burn out or slip up. Crucially, automated underwriting can also take account of factors relevant to approval — such as spending habits and social-media comportment — that go beyond old-fashioned assessments based on credit scores and biographical questionnaires.
- Consistency: The rules the lender sets for automated credit decisioning can be both customized to specific clients or client types and consistent with bedrock policies. Say goodbye to guesswork and interpretation.
- Portfolio yield: Automated underwriting lays the groundwork for predictive models that pinpoint optimal loan rates and terms while helping lenders of all kinds improve portfolio yield by selecting the most profitable customers.
- Productivity and workflows: Once again, lenders and applicants alike benefit from a credit-underwriting system that saves time for everybody involved. Faster approvals and streamlined processes for the lending lifecycle from applications to final repayment make for more accurate outcomes and more cost-effective lending.
- Analytics: Robust and accurate digitalized underwriting makes for actionable lending intelligence derived from accessible data analytics that can guide operational improvements and create new marketing and UX insights.
- Compliance and fraud detection: Underwriting automation strengthens fraud-detection efforts by means of predictive analytics. In addition to raising red flags, a robust automated lending platform will allow updated rules to take force across the entire system, instantly. In this way, the lender is much likelier to remain compliant and on guard against fraud.
- Scalability: Automated underwriting is scalable in that an influx of new customers doesn’t necessarily call for more people to perform credit-check responsibilities around classification, analysis, stacking, and extraction. And in our context, automated underwriting is understood to be part of a loan processing system that encompasses other critical functionality around loan and loan-portfolio management for end-to-end scalability that allows companies to cover more ground without having to add headcount.
- Affordability: This is especially true of automated underwriting linked to systems with a modular format. “With TurnKey Lender, you can start small and add functionality as needed,” says Ionenko. “As a reflection of our clients’ preferences, it’s as far from all-or-nothing as it gets.”
- Oversight: Automated underwriting — like all elements of lending automation — leaves tracks. This analytical prowess, already mentioned, also helps managers and executives stay on top of things generally, and enables troubleshooting and internal audits.
- Customer experience and marketing: As more companies in more fields employ automated underwriting, more consumers and companies eager to secure financing have come to see it as a must-have in a financing partner. They may not know that credit decisions hinge now on sophisticated algorithms and artificial intelligence with the ability to learn new lessons and make sound inferences. They may only know that their credit applications are processed faster than ever before. But that’s enough to feed into positive word-of-mouth publicity and enhance the lender’s overall marketing efforts.
Ten is a nice round number, but it wouldn’t be hard to extend the list of the benefits companies can derive from automated underwriting. To this end, terms like “Convenience,” “Ubiquity,” and “New revenue from fees” spring to mind. But you’d be hard-pressed to make the point better than TurnKey Lender’s Ionenko.
“From the lender’s point of view, underwriting is the first gate-keeping function in every loan application,” says the tech executive. “Making sure it goes as quickly, accurately, and pleasantly as possible can set the tone for the entire engagement, lead to repeat business and, overall, enhance the average value of your customers.”