Once, most lending was done by traditional financial institutions, like banks.
These banks were focused on consistency and risk control—not innovation.
Adoption of new technology was slow, and when banks wanted to get serious about improving efficiency, they usually focused on a specific workflow—like commercial lending. To enhance these workflows, banks would buy a handful of products—a so-called “best-of-breed” approach.
This approach would certainly result in major, short-term efficiencies, as banks migrated to paperless processes.
However, banks would eventually find themselves with multiple products and vendors who didn’t talk to one another, resulting in a crazy-quilt of solutions across different processes and loan types.
This patchwork of tools and processes wasn’t viewed as a problem—or, at least not an urgent one—as it was a common issue across most banks. It also wasn’t a problem that was easily solved given that there were usually entrenched, separate systems for each loan type, and almost no providers that could provide comprehensive solutions.
That problem became urgent with the arrival of the alternative lenders.
With their lean cost structures and compelling digital borrower experiences, alternative lenders could provide certain types of loans more quickly, conveniently and transparently than their bank counterparts.
At first, banks were dismissive of the alternative challenge, saying that those lenders were wasting their time chasing unprofitable loans—apparently not realizing that alternative lenders could undermine banks’ customer relationships.
Once the threat became clear, banks struggled to play catch-up in the digital channels where they were traditionally weak or absent.
This effort was made harder because the guts of their lending workflows were comprised of those separate systems from separate vendors—the “best-of-breed.” This meant that, even if banks were able to develop compelling digital offerings, borrowers faced disappointing service experiences at the back-end.
Taming the Best-of-Breed
Recently, banks caught a few big breaks in competing with alternative lenders:
Interest rates: After three decades of nearly uninterrupted declines, interest rates seem to be heading upwards in earnest, making banks more profitable, and reducing alternative lenders’ access to capital.
Regulation: Regulators are taking a closer look at alternative lenders, and they will probably face higher costs related to compliance.
Technology: Some fintech providers are providing sweeping software solutions for lending, which cover every loan type and step in the lending workflow, start-to-finish.
These new technology solutions—the so-called, end-to-end solutions—replace best-of-breed and solve many of the solutions endemic to those types of systems.
Key advantages include:
Efficiency: Eliminating the rekeying of data across the entire lending lifecycle, and even integrating with core systems, can reduce time to approval from days to minutes, and allow the same lending team to triple or quadruple their workflow.
Transparency: End-to-end solutions reduce the time to approval, and also provide comprehensive views of the lending process, so borrowers know what’s happened, what needs to happen, and any outstanding information they need to provide.
Compliance: End-to-end solutions create consistent, repeatable workflows within the borrowing process, and also reduce time and effort for regulatory reporting.
Security: Multiple systems pose an inherent risk because the entire process becomes only as secure as the least secure vendor. Single-vendor solutions allow the banks to focus on a single provider.
Vendor Management: Vendor management can be frustrating and time-consuming. Having a single vendor presents significant time and costs savings for lenders.
End-to-end solutions do not eliminate potential disruption from alternative lenders. Banks still need to work to create compelling offers and experiences with customers. More significantly, banks need to become more agile in responding to new opportunities and threats, to avoid having hard-fought client relationships move to new providers.
Still, the technological advantages of end-to-end solutions give banks the ability to capitalize on the current, favorable market environment. This second wave of technology can help tame the problems of best-of-breeds, and create a sustainable advantage for banks in their struggle with disruptive alternatives.