Committees : Lending

The Unique Benefits of Digital Small-Business Lending

Digitization has transformed how banks operate and how consumers interact with their banks.

But efforts to completely digitize lending from end-to-end lag significantly behind other areas of the financial and payments space. For instance, there are only a handful of lenders who have managed to completely digitize the consumer mortgage process. U.S. Bancorp, one of the largest banks in the United States, only recently unveiled its “digital mortgage experience.” And efforts to digitize small- to medium-sized business lending trail even further behind, left in the dust of the digital banking and mortgage frenzies.

But why is that — especially when there are several technology firms that provide white-label, third-party digital platforms for small business loans? These firms can fully digitize the application and underwriting process for a bank, increasing efficiencies and enhancing the borrower experience. A digital process can save up to eight hours in processing time and up to $4,000 in costs per loan for a bank, according to internal data from Akouba, Velocity Solutions’ digital lending platform for commercial and consumer loans. So why haven’t more community banks adopted this technology?

One reason may be that banking executives simply may assume the benefits of digital lending end at the time and cost savings. Most bankers know that “digital lending” means the digitization of all or parts of the loan origination and funding process. They know that borrowers using a digital solution would typically initiate the loan process on a bank’s website. The borrower would receive fast approval or denial of the loan and can accept the terms of the loan and sign documents electronically. They know that funding can be immediate or may take a few days.

But what some of these bankers may miss are the many other attributes of digital lending that can actually grow loan volume, improve efficiency and translate into bottom-line savings and increased income. Here are a few:

1. Loan Review and Renewal
Digital lending technology can automate the entire renewal and review process of a bank’s existing loan portfolio, including the collection of loan data and communication to borrowers. The technology can provide a dashboard view of all annual renewals or interim reviews for snapshot or detailed information about the entire loan portfolio.

Automating the renewal and review processes can reduce a bank’s costs by as much as 50%, according to our data, while minimizing the time required to access various resources from four to six hours to 30 minutes. Just as important, team members who were previously dedicated to manual, paper-based tasks can now more efficiently meet borrower and bank needs elsewhere.

2. Financial Analysis and Spreading
While some digital loans can be managed entirely online, some, like larger commercial real estate loans, may need human intervention. Cloud-based automated lending software automates the manual input of borrower financial data, like tax forms, and eliminates the need to manually spread deals, which makes the lending cycle more productive.

Beyond gathering documentation, financial analysis and spreading — for instance, calculating the Debt Service Coverage (DSC) ratios for business loans and debt-to-income (DTI) ratios for consumer loans — can often take 90 to 120 minutes, depending on the capabilities of the credit resource. Digital lending technology can reduce the time to perform spreading to an average of 30 minutes to five minutes or less; the average ratio calculation can be completed in less than 10 minutes, compared to the average 45 to 60 minutes. The system can use IRS tax transcripts as a source of data that can be spread using automated tools.

3. Data-Driven Marketing and Targeting 
A digital lending platform can analyze customers’ existing transactional data to identify qualified prospects who are likely to borrow from your bank. This includes those who currently turn to alternative sources such as fintechs or other online lenders, competitive institutions like other banks or even payday lenders. A data-driven system can identify quality creditworthy borrowers who have a high likelihood of converting to a digital loan product, and then provide targeted omnichannel engagement (such as print, email, text message) to communicate to these potential applicants.

These are only three underappreciated features of digital lending technology. What you don’t know may be costing your bank time, money and — most importantly — potential borrowers.