Alternative data doesn’t just benefit banks by enhancing credit decisions; it can help expand access to capital for consumers and small businesses. But effectively leveraging new data sources can challenge traditional banks. Scott Spencer of Equifax explains these challenges — and how to overcome them — in this short video.
To create a meaningful customer relationship, banks should drive to simplify and streamline the operational process to book a loan.
Automated touchpoints are a natural component of the 21st century customer experience. When properly implemented, technology can create a touch-free, self-service model that simplifies the effort required by both customer and bank to complete transactions. One area ripe for technological innovation is the lending process. Banks should consider how they can remove touch points from these operations as a way to better both customer service and resource allocation.
Frictionless loans can move from origination to fulfillment without requiring human intervention, which can help build or enhance relationships with clients. Your institution may already be working on decreasing touches and increasing automation. But as you long as your bank has an area of tactile, not strategic, contact between your staff and your customer, your bank — and customers — will still have friction.
Bankers looking to decrease this friction and make lending a smooth and seamless process for borrowers and originators alike should ask themselves these four questions:
How many human touchpoints does your bank still have in play to originate and fulfill a loan? Many banks allow customers to start a loan application online and manage their payments in the cloud, but what kind of tactile processes persist between that initial application and the payment? Executives should identify how many steps in their lending process require trained staff to help your customers complete that gap. Knowing where those touchpoints are means your digital strategy can address them.
What value can your bank achieve by reducing and ultimately eliminating the number of touches needed to originate a loan? Every touch has the potential to slow a loan through the application process and potentially introduce human error into the flow. But not all touchpoints are created equal.
Bankers should consider the value of digital data collection, or automating credit score and loan criteria review. They may be able to eliminate the manual review of applications, titles and appraisals, among other things. They could also automate compliant document creation and selection. Banks should assess if their technology enablement efforts produce a faster, simpler customer experience, and what areas they can identify for improvement.
Do you have the right technology in place to reduce those touchpoints? Executives should determine if their bank’s origination systems have the capabilities to support the digital strategy and provide the ideal customer experience. Does the bank’s current solution deliver an integrated data workflow, or is it a collection of separate tools that depend on the manual re-entry of data to push loans through the pipeline?
Does your bank have an organizational culture that supports change management? Does your bank typically plan for change, or does it wait to react after change becomes inevitable? Executives should identify what needs to happen today so they can capitalize quickly on opportunity and minimize disruptions to operations.
Siloed functional areas are prone to operational entrenchment, and well-intentioned staff can inadvertently slow or disrupt change adoption. These factors can be difficult to change, but bankers can moderate their influences by cultivating horizontal communication channels that thread organizational disciplines together, support transparency and allow two-way knowledge exchanges.
For banks, a human touch can be one of the most valuable assets. It can help build long lasting and meaningful relationships with clients and enable mutual success over time. This is precisely why banks should reserve it for business activities that have the greatest potential to add value to a client’s experience. Technology can free your bank’s staff from high-risk, low-return tasks that are done more efficiently through automation while increasing their opportunities to interact with customers, understand their challenges and cross-sell products.
Frictionless loan planning should intersect cleanly with your bank’s overall digital strategy. It could also be an opportunity for your bank to scale up planning efforts, to encompass a wider set of business objectives. In either case, the work you do today to identify and eliminate touch points will establish the foundation necessary to extend your bank’s digital reach and offer a competitive customer experience.
Banks can use transaction information from checking accounts to transform their digital lending experience for customers.
Banks can use digital lending to provide a direct, fully self-service experience to customers and significantly improve their delivery efficiency. It gives them a way to automate decision-making and operational processes with expanded connectivity. But they should consider three ways they can leverage transaction account information to further enhance digital lending: application automation, enhanced real-time decision analysis and ongoing credit monitoring.
Application Automation. Banks can use digital transaction information to speed up the loan application process. Technology like customer-driven digital access that links checking and transaction activity allows small businesses and consumers to quickly and simply share their digital footprint with just three or four fields and a click, compared to multi-page applications.
For example, bank customers can provide in seconds their checking information digitally, documenting identify verification, customer vitals and addresses, income or sales revenue, payments, expense analysis and trends over time. This approach offers convenience for customers and creates efficiency for the bank.
New bank customers can do the same thing with account aggregation, using their online banking credentials to share their account data. Account aggregation has become routinely successful, as providers have enhanced their offering and bank regulators have touted the benefits of customer-authorized aggregation services. Fintech lenders like Kabbage market their speed with integration to transaction accounts; now, some banks are implementing similar processes to automate a digital loan application in a few seconds.
Enhanced Real-Time Decision Analysis. Once a prospective borrower creates a digital loan application, banks can use a variety of systems to provide underwriting analysis using algorithms for automated decisions. Checking account deposit history that documents income or sales revenue and transaction details provides a much richer set of data, compared to solely credit-based systems. Trends in types of deposits by tran-code, along with payment frequency and insufficient funds activity also substantially enhance the automated decision process. More importantly, deposit activity for consumer and small business loans provides banks with significant insight into a customer’s ability to repay, something that is not captured by credit histories and simple income validation.
Ongoing Credit Monitoring. While there is a fast-growing amount of digital lending capabilities and competitors, far too often fintech companies overlook loan monitoring of originated loans as part of the digital process. Banks’ digital monitoring of transaction accounts is the most important part of an automated credit monitoring process for consumer and small business loans.
For example, a bank’s loan monitoring file for a $40,000 small business loan may have a tax return that was pulled months ago and may not resemble the current operation. The compiled financial statement provided by the client may not reflect all the latest financial condition. A guarantor’s lagging credit scores can create real risks for banks.
Checking account deposits, transactions, insufficient funds and other activity, along with loan balances, can be digitally monitored by banks, complete with alerts for immediate pattern changes. For example, if a bank sees that a borrower’s deposits have fallen by half, insufficient funds transactions are increasing, the loan balance remains flat and the guarantor’s credit score is trending downward—all revealed through automated soft-pull functionality built into the credit monitoring system—it can be alerted to potential trouble approaching. Banks can implement this digital automation of credit monitoring for existing loans as well, which is a fast-growing segment of digital technology.
Banks can make decisions about managing risk using current account transaction data far in advance of typical credit reporting tools by leveraging the transaction account data digitally. Similarly, banks can monitor consumer transaction accounts for risk changes. Banks can use digital monitoring transaction activity to enhance risk management, efficiency and compliance.
The strongest feature of digital lending is the expanded and expedited view of the customer, provided by instant integration of checking and transactional account information for banks in serving consumers and small businesses.
By this point in 2019, most consumers and companies are somewhat familiar with the concept of artificial intelligence. Executives and consultants have discussed its application in financial services for years; lately, the conversations have been brisk and some organizations are doing more than just talking. Many tangible AI use cases have emerged at financial institutions of all sizes over the last 12 months, and intelligent technology is beginning to make an impact on banks’ productivity and bottom lines.
Still, AI remains a largely abstract concept for many institutions. Some of the biggest challenges these banks face in preparing and executing an AI strategy starts with having a too-narrow definition of these technologies.
Technically, AI is the ability of machines to use complex algorithms to learn to do tasks that are traditionally performed by humans. It is often misrepresented or misunderstood in broader explanations as a wider range of automation technologies — technologies that would be more appropriately characterized as robotics or voice recognition, for example.
Banks interested in using intelligent automation, which includes AI, robotic process automation, and other smart technologies, should target areas that could benefit the most through operational efficiencies or speed up their digital transformation.
Banks are more likely to achieve their automation goals if executives shift their mindsets toward thinking about ways they can apply smart technologies throughout the institution. Intelligent automation leverages multiple technologies to achieve efficiency. Some examples include:
Using imaging technology to extract data from electronic images. For example, banks can use optical character recognition, or OCR, technology to extract information from invoices or loan applications, shortening the completion time and minimizing errors.
Robotic process automation, or RPA, to handle high-volume, repeatable manual tasks. Many institutions, including community banks with $180 million in assets up to the largest institutions in the world have leveraged RPA to reduce merger costs, bundle loans for sale and close inactive credit and debit cards.
Machine learning or AI to simulate human cognition and expedite problem solving. These applications can be used in areas ranging from customer service interactions to sophisticated back-office processes. Some industry reports estimate that financial institutions can save $1 trillion within the next few years through AI optimization. Several large banks have debuted their own virtual assistants or chatbots; other financial institutions are following suit by making it easier and more convenient for customers to transact on the go.
What are next steps for banks interested in using AI? Banks first need to identify the right use cases for their organization, evaluating and prioritizing them by feasibility and business need. It’s more effective to start with small projects and learn from them. Conduct due diligence to fully assess each project’s complexity, and plan to build interactively. Start moving away from thinking about robots replacing employees, and start considering how banking smarter – not harder – can play out in phases.
Advanced data science technologies like artificial intelligence (AI), machine learning and robotic process automation are delivering significant benefits to many banks.
As part of their mandate to protect shareholder value and improve financial performance, bank directors can play an important role in the adoption of these promising new technologies.
Technology’s expanding influence With fintech companies generating new competitive pressures, most traditional banks have recognized the need to adopt some new techniques to meet changing customer habits and expectations. Declines in branch traffic and increased online and mobile banking are the most obvious of these trends.
Yet, as important as service delivery methods are, they are in a sense only the top layer of bigger changes that technology is bringing to the industry. New data-intensive tools such as AI, machine learning and robotic process automation can bring benefits to nearly all areas of a bank, from operations to sales and marketing to risk and compliance.
Advanced data analytics can also empower banks to develop deeper insights and make better, more informed strategic decisions about their customers, products and service offerings.
The power of advanced analytics Historically, business data systems simply recorded and reported what happened regarding a customer, an account, or certain business metrics. The goal was to help managers understand what had happened and develop strategies for improving performance.
Today’s business intelligence systems advance this to predictive analysis – suggesting what is likely to happen in the future based on what has been observed so far. The most advanced systems go even further to prescriptive analysis – recommending or implementing actions that increase or decrease the likelihood of something happening.
For example, AI systems can be programmed to identify certain customer characteristics or transaction patterns, which can be used for customer segmentation. Based on these patterns, a bank can then build predictive models about those customer segments’ likely actions or behaviors – such as closing an account or paying off a loan early.
Machine learning employs algorithms to predict the significance of these customer patterns and prescribe an appropriate response. With accurate segmentation models, a bank can tailor marketing, sales, cross-selling and customer retention strategies more precisely aligned to each customer.
Automating these identification, prediction, and prescription functions frees up humans to perform other tasks. Moreover, today’s advanced analytics speed up the process and can recognize patterns and relationships that would go undetected by a human observer.
Industry leaders are using these tools to achieve benefits in a range of bank functions, such as improving the effectiveness of marketing and compliance functions. Many large banks already use predictive modeling to simplify stress testing and capital planning forecasts. AI and machine learning technology also can enhance branch operations, improve loan processing speeds and approval rates and other analytical functions.
Getting the data house in order While most banks today are relatively mature in terms of their IT infrastructures and new software applications, the same levels of scrutiny and control often are not applied to data itself. This is where data governance becomes crucially important – and where bank directors can play an important role.
Data governance is not just an IT problem. Rather, it is an organization-wide issue – and the essential foundation for any advanced analytics capabilities. As they work to protect and build shareholder value, directors should stay current on data governance standards and best practices, and make sure effective data governance processes, systems and controls are in place.
AI, machine learning, and robotic process automation are no panacea, and banks must guard against potential pitfalls when implementing new technology. Nevertheless, the biggest risk most banks face today is not the risk of moving too quickly – it’s the risk of inertia. Getting started can seem overwhelming, but the first step toward automation can go a long way toward taking advantage of powerful competitive advantages this technology can deliver.
Automation makes it possible for banks to gain efficiencies and help their employees be more effective. But how can bank leaders ensure they’re getting the most out of these solutions? Richard Milam, the CEO of the software company Enablesoft, explains that people—not technology—will drive success in these efforts, and culture plays an important role.
It’s noon. You’re halfway through your road trip, miles of highway behind you and your stomach tells you its lunchtime. Your passenger asks Siri for directions to the nearest McDonald’s. From the restaurant’s mobile app, he orders two No. 3 meals, selects a pick-up time, and pays—all in less than three minutes. You exit the highway, pull up to McDonald’s and in no time are back on the road, eating lunch.
This type of digital experience—what you want when you want it—is quickly becoming the standard for consumer expectations. As a recent digital lending study reported, McDonald’s CEO Steve Easterbrook rolled out the company’s app “to embrace change to offer a better McDonald’s experience” and has also said that “it’s pretty inevitable that our customers will increasingly engage with us as a brand and as a business through their phones.”
The McDonald’s experience is relevant because that type of experience is what consumers expect from financial institutions as well. In fact, by 2021, half of adults worldwide will use a smartphone, tablet, PC or smartwatch to access financial services—up 53 percent from 2017—according to Juniper Research.
Further, the 2016 MX Consumer Survey finds that 81 percent of consumers prefer to interact with their financial institutions by desktop, laptop and/or mobile device. The same study shows that 38 percent of consumers have reduced how often they bank somewhere due to a poor digital experience.
One of the greatest growth opportunities for community banks is end-to-end digital automation of the lending process, especially for small- and medium-size business loans. Not only do these loans lend themselves to process automation, but the competition—and market potential—is growing rapidly. By 2020, some media reports suggest the market for online business loans could exceed $200 billion.
Why it Works Today, small business lending is a labor-intensive process for which most community banks see little financial reward. The majority of community banks use the same process to underwrite loans as small as $50,000 as they do for larger multi-million dollar loans, which include paper applications and documentation and multi-level approvals.
This mostly manual process can cost as much as $3,000 per $100,000 loan, according to industry research firms, far outweighing any income to be made. While some banks have continued to make these loans even at a loss to preserve existing customer relationships, many have stopped making them altogether.
The latter is unfortunate. Historically, community financial institutions have dominated this lending space, strengthening their customer relationships through personal attention, decision speed, and loan term flexibility.
In the aftermath of the 2008 financial crisis, many community banks pulled back on small business loan approvals, which gave rise to a plethora of online lenders like OnDeck and LendingTree, that embraced digital advancements. As a result of this convergence of technology, small business lending from community banks has fallen more than 20 percent since 2008.
Digital Changes the Business Case, Customer Experience Fortunately, the opportunity to win back this business is encouraging. Digital lending technology automates the entire lending process, enabling banks to deliver loans more efficiently, maintain their traditional underwriting, pricing and compliance practices and provide a seamless, 24/7 digital experience.
Here are some benefits to using digital lending technology:
Your customer’s loan journey is entirely online, from application to closing.
Borrowers can sign all documentation within the app.
Decisions can be made within 48 hours.
Additional documentation (if needed) can be uploaded within the app.
Loans are automatically booked and funded to your bank’s core.
Adding this capability does not require expensive development resources either. The technology is often readily available through white-label products. Industry advocacy organizations including the ABA have reported these white-label, cloud-based solutions represent “a very strong option,” that can be implemented quickly, use a pay-per-volume model and have the ability to customize. They also allow the bank to maintain its underwriting criteria and standards, and hold the loans on your own books.
As with other retail experiences, your small-business customers expect ease and convenience in the lending process. If you do not provide it, others will.
Until now, treasury management solutions have been focused almost solely on helping clients execute payments. These solutions have emphasized simplified payments and payment method flexibility. This can be referred to as Integrated Payables 1.0.
New and disruptive accounts payable automation has enabled banks to offer a more holistic solution, which caters to their customers’ end-to-end accounts payable process while addressing an even broader range of customer pain points. This can be called Integrated Payables 2.0.
Offering solutions that leverage automated processes can provide benefits for commercial banks they aren’t realizing with the legacy solutions. A couple of key benefits that offering Integrated Payables 2.0 technology provides to banks in comparison to traditional Integrated Payables 1.0 solutions include:
Addressing the end-to-end accounts payable process, instead of just payment execution, provides customers with more value.
The first step to understanding the benefits Integrated Payables 2.0 solutions provide is centered on understanding the end-to-end accounts payable process for their customers. This process, regardless of company or industry, generally involves four steps:
Invoice Capture: Lifting data from vendor invoices and coding it into an accounting system.
Invoice Approval: Confirming vendor invoices are accurate and reflect the agreed upon amount.
Payment Authorization: Creating a payment run, getting the payment approved by an authorizer, and leveraging the correct payment type and bank account to use.
Payment Execution: Sending money to vendors.
Within this process, Integrated Payable 1.0 solutions are only serving step #4: Payment Execution. The truth is every payment is the result of an invoice, and the process of making a payment includes all of the steps in between receiving the invoice and paying it. By not streamlining steps leading up to the payment, Integrated Payables 1.0 solutions allow opportunity to improve efficiency.
Integrated Payables 2.0 solutions streamline all four steps by providing one simple user interface that eliminates unnecessary manual processing. By offering Integrated Payables 2.0 solutions, banks provide more value to their customers by addressing the pain each of these manual steps brings throughout the AP process.
Becoming a strategic partner (instead of just a solution provider) to customers drives retention by creating switching costs.
There are a lot of costs associated with manual accounts payable that businesses face every day. Some are very straightforward and easy to track, like processing fees. But there are other costs that are less apparent, but have much broader cost implications on the business. These costs include:
Wasted time reconciling duplicate invoice payments.
Missed revenue from rebates and early-pay discounts.
Value-added projects that never get done.
With the middle-market businesses paying more than 100 invoices every month, costs add up tremendously over the course of a year. When you can eliminate these costs from your customers’ accounts payable process by providing them with an end-to-end accounts payable solution, you will be able to establish a loyal list of customers.
With only a small fraction of businesses currently automating accounts payable, it is clear Integrated Payables 2.0 solutions are still approaching it’s tipping point.
Banks have an opportunity to get ahead of competitors and differentiate themselves by offering a disruptive solution. Then, when their customers get offers from other banks to switch, the switching costs associated with going back to manual accounts payable are likely to dissuade them from making the switch.
Although Integrated Payables 1.0 solutions have been helpful to your customers for years, new disruptive technology is creating even greater capabilities for mid-sized businesses to efficiently pay their bills, and for you to further strengthen your relationships with customers by providing this technology in the form of a white-label solution.
Adom Greenland works with a lawn care specialist who was running his business in a way reminiscent of a bygone era. He’d leave a carbon copy invoice on the counter when he finished his work, Greenland would cut a check and some three weeks later, the small-business owner would finally be compensated for the work he had done weeks prior.
That arrangement is one that still exists in many rural areas, but Greenland, the chief operating officer at $642 million asset ChoiceOne Bank, headquartered in Sparta, Michigan, saw an opportunity to help rural customers like his lawn care specialist usher themselves into the 21st century by partnering with Autobooks.
ChoiceOne found itself in a position that many banks in the country have found themselves in at some juncture in the last several years: recognizing the need to make a move to remain competitive with booming fintech firms popping up all over the place. Located in a largely rural area in western Michigan—Grand Rapids, with about 200,000 residents, is the largest city in its area—the bank has been a fixture for its rural community but is slowly moving into urban markets, Greenland says. Its specialties include agricultural and small business borrowers that are comfortable with antiquated practices that often aren’t driven by technology. But in an increasingly digital world, Greenland says the move was made to make both the bank and its commercial customers competitive by improving its existing core banking platform to digitize treasury services for commercial customers.
ChoiceOne chose Autobooks to digitize its small business accounting and deposit process in 2017, a journey the bank began three years ago after realizing that the technology wave rolling over the banking industry was going to be essential for the bank’s future. But identifying potential partners and wading into the due diligence process was at times frustrating, Greenland says. “Everything was either, you had to pay a quarter-million dollars and then had to hope to sell it to somebody, or it was just 10-year-old technologies that weren’t significantly better than what we already had.”
Autobooks, through an array of application programming interfaces, or APIs, essentially automates much of the bank’s existing treasury services such as invoicing, accounting and check cashing processes. The system sits on top of the bank’s existing banking platform from Jack Henry, but works with FIS and Fiserv core systems as well.
With just 12 branches in a predominantly rural market, Greenland says this has become a game changer for the bank and its customers.
“My sprinkler guy could have been doing this a long time ago, but this will accelerate the adoption of technology [by] my rural customers,” Greenland says. “It’s bringing my customers to the next century in a really safe and easy way.”
The partnership between Autobooks and ChoiceOne generates revenue for both companies through fees. It is a similar arrangement to that of Square, QuickBooks or PayPal, the competitors Greenland is trying to outmaneuver while integrating similar accounting, invoicing and payments functionalities.
So far, the partnership has been able to reduce the receivables time by about two weeks, and automates many time-consuming tasks like recurring invoicing, fee processing and automatic payments. It also cuts expenses for the bank’s customers that have been using multiple third-party providers for similar services, which has driven loyalty for the bank. ChoiceOne hasn’t generated significant revenue from the partnership—Greenland says it’s at essentially a breakeven point—but the loyalty boost has been the biggest benefit, an attribute that’s becoming increasingly important as competition for deposits rises.
And the results are visible for small businesses, like Greenland’s sprinkler technician. “For that kind of business, this thing is absolutely revolutionary.”
Automation is a common buzzword these days in the financial services industry. What does it really mean for your business, and how far can you take automation through your credit origination process?
We have compiled the top five benefits of applying automation throughout your credit process.
Reduce back and forth client interactions Instead of scanning, emailing, and faxing financial information and supporting documentation, customer-facing interactive portals and APIs can facilitate digital capture of required information.
Eliminate unnecessary manual work By leveraging a portal that connects to the borrower’s financial accounting package, and has the technology to read tax forms digitally, you can reduce the amount of unnecessary manual data entry.
Make quicker and smarter decisions Through the application of innovative machine-learning technology, the time required to generate financial spreads can be significantly reduced.
Maintain high-quality data accuracy and governance Data integrity can potentially be compromised when several systems are used to store the same information. Turn-key integration between your customer engagement portal and loan origination system helps to keep all your data within one system.
Gain a complete view of your portfolio With improved accuracy and quick access to available data comes better and faster insights into your portfolio. By reducing the need to consolidate and reconcile data from multiple sources, problems within your portfolio can be addressed in real time.