Modernizing Business Lending to Drive Growth

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Digitization has altered the business lending landscape and created competitive pressure that will continue to push solutions modernization — and consumers and businesses are ready.

Digital efficiency here is key and underpins lending success. Most importantly, it improves consumer retention, upsell, and cross-sell opportunities for lenders. As the future of business lending caters to the needs of younger entrepreneurs, financial institutions will want to add solutions that offer seamless experiences. This includes a fully contactless digital lending process: seamless digital applications all the way to fast, automated loan decisions. Financial institutions can jump-start and grow digital business lending by implementing advanced technology solutions to digitally engage borrowers and optimize lending processes.

Digital-First Mindset Drives Growth
Millennials are the largest drivers of new loans. This makes sense considering there were more than 166 million individuals under the age of 40 in the U.S. in 2020 — more than half of the U.S. population.

Financial institutions are feeling the pressure all around. Digital banking reigns supreme as consumers increasingly prefer to manage their finances digitally and loyalty is waning. Institutions need to offer innovate lending solutions and reconsider how they engage consumers. Already, digital-savvy financial institutions are scooping up this business. According to the Bain Retail Banking NPS Survey, 54% of loans and 50% of credit cards in the U.S are opened at providers that consumers do not consider their primary financial institution. And more than three-quarters of those surveyed who received a direct offer from a competitive institution said they would have purchased from their primary institution had they received a similar offer.

As more and more lenders provide digital-first experiences, consumer expectations have evolved. Processes that used to take days can now happen in minutes. Technology has decreased the operational effort required of financial institutions and enables demand creation, so institutions can reach new consumers and foster deeper relationships with existing ones.

Pressure to Modernize Business Lending Solutions
Institutions that have not modernized business lending processes are feeling the pressure. Those that still rely on manual and paper-based loan approval procedures find they are out of step with a digitized world, affected by:

  • Slower decision times.
  • Burdensome data management.
  • Time-intensive manual processes that span disparate systems.
  • Inefficient application processes and communications with the borrower.
  • Expensive wet signatures.
  • Difficult document collection, management and storage.

The cumulative effects of these inefficiencies are compounded by the evolving landscape in lending. Nearly nine in 10 financial institutions believe they will lose some business to stand-alone fintech companies over the next five years. That fear is not unfounded.

Managing Credit Risk in a New Era
The business credit framework has not changed. Lenders still consider credit profile and history, firmographics and cash flow analytics when evaluating debt capacity. This requires the ability to collect and analyze data like macroeconomic factors, industry trends, digital presence, credit performance, financials, bank accounts, POS transactions and business credit reports.

Solutions to manage risk, however, have modernized. Advancements in machine learning techniques have transformed risk analysis to consume thousands of data points and leverage insight and learning from decades of loan performance data. For business lenders, this means better, faster, more accurate and consistent decisions in compliance with the set credit policy. Digital-first lenders can:

  • Use superior workflow tools to aid in better decision-making and operational resiliency.
  • Leverage risk assessment techniques that cannot be performed by humans.
  • Improve accuracy and consistency of credit decisions.
  • Specialize and customize by industry based on business goals.
  • Leverage new data sources and decades of credit performance data.
  • Process large volumes of data in seconds alongside the ability to identify and focus on what matters most.

Financial institutions transitioning to digital channels enjoy more opportunities to better serve consumers, expand market share and drive more revenue.

Reduce Lending Risk in the Omnichannel Environment

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Credit risk and risk associated with digital origination and authentication have become top of mind for bank boards and executives. Banks that are able to optimize lending practices to give consumers faster and more efficient experiences and interactions throughout their digital lending journey are seeing greater pickup and success.

Today, many borrowers prefer application processes that accommodate both digital and staff-assisted capabilities when seeking a loan. To process loans in an omnichannel delivery ecosystem, banks are turning to lending options that have the ability to prospect, originate, underwrite, process and close secured and unsecured credit cards, lines of credit and installment loans.

Manually assessing an applicant, their collateral and whether the loan meets the bank’s compliance requirements and lending policies increases the risk of inconsistencies, oversights and unintended consequences. Automation provides institutions with consistent inputs, analysis, compliant processes and calculations, predetermined classifications, accurate risk-based pricing, consistent warnings for policy exceptions and predictable decisions and outcomes with greater speed and efficiency. It also improves the interpretation and analysis of the applicant, credit, debt obligations, collateral and the execution of the institution’s inclusion/exclusion policies, such as summing up debt totals and calculating ratios used in the underwriting process. It can calculate the proposed loan payment, annual percentage rate (APR), and ratios at the applicant, household, business, guarantor and loan levels. It can also calculate custom credit scores.

While banks receive many benefits from using digital channels to serve borrowers, they also face vulnerabilities and risks such as fraudulent applications and data privacy concerns. In addition, digital lending might require a bank to collaborate with numerous third-party fintechs, exposing both borrowers and the institution to new and heightened levels of risk.

Banks need more cost-effective processes and decision models to address qualification ratios associated with online lending. These models should employ analytics and automation that can decline, decision, and refer applications appropriately to maintain an institution’s profitability, mitigate risk and not overwhelm lenders.

Mitigating Credit Risk and Increasing Productivity
Technology simplifies the loan origination process for banks and customers by guiding customers through each step in the process. Technology and automation can eliminate errors and the need to rekey data, which streamlines operations and enables staff to focus on additional revenue-generating opportunities.

Institutions that would prefer to slowly test automated decisioning can start with automated decisioning for denials for applications that fall outside of loan policy. An instant denial allows loan teams to focus on profitable and better-qualified candidates. Decisioning analytics evaluate areas such as credit quality, borrower stability and collateral risk. A decision and rules engine applies industry standards, institution-specific rules and policies and custom attributes, such as credit report analysis, for automated decision support during the loan origination process.

Automated solutions can provide speedy decisions while meeting compliance standards. This can help boost employee productivity; the consolidated customer information and loan details provides a 360-degree view of the overall financial relationship and deal structure. Bank associates can manage and expand relationships and target product recommendations based on customer needs.

An Omnichannel Environment for Lending
The technology and analytics of an omnichannel environment gives banks a competitive advantage when it comes to loan origination. Applicants can shop and compare loan options, submit loan applications and receive real-time automated decisioning and status updates.

An omnichannel ecosystem provides seamless start, save and resume cross-channel application processing: customers can begin the research and application process on a mobile device, continue the application and upload documents on an alternate digital device, and engage live assistance from contact center or branch lending specialists without losing their progress. The technology can guide customers and staff members through each phase, improving customer engagement by triggering staff actions and automating workflows. Digital capabilities intertwined with human engagement increases staff productivity and efficiency through analytics and workflow.

The omnichannel approach balances technology and human resource allocation based on customer need and complexity. Technology automates business criteria to issue decisions in real time or have the loans manually reviewed by underwriters, if warranted. Applying decisioning analytics allows banks to strengthen governance, risk and compliance by establishing proof of process. An omnichannel delivery environment that drives the application and origination process gives banks a way to provide a seamless lending experience that meets customers’ needs.

5 Reasons to Integrate Consumer, Mortgage Lending

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In today’s economy, banks should aim to deliver personalized offers for products and services that consumers need at the exact moment when they need them.

Unfortunately, many financial institutions house data about their various products, including consumer and mortgage loans, in departmental silos, resulting in lost opportunities to cross-sell products and services. Lost cross-sell opportunities may cause banks to lose money and account holders. When loan officers within each business unit are only interested in increasing the sales of their individual products, rather than enabling the sale of multiple lending products across their institution, they leave money on the table. Moreover, account holders may have different experiences, or be asked for the same information multiple times when applying for each loan type.

Although banks can offer affordable and competitive loan products and services to consumers, they need an effective strategy to break down silos and reach borrowers wherever they may be on their financial journey.

Millennial and Generation Z consumers, for example, are often first-time borrowers. As more members of these generations look to purchase homes, lenders will want to provide top-notch digital and personalized experiences and educate them about other financial products and opportunities.

Compounding that, rising costs due to inflation and the ever-changing economy are also taking their toll on consumers’ pocketbooks as they deal with debt, including credit card debt and student and auto loans. Forty-five percent of millennial and Gen Z adults are concerned that they will be denied mortgage loans because they have more debt than income, according to the Maxwell 2022 Millennial & Gen Z Borrower Sentiment Report.

While it’s no secret that consumers expect more from their digital interactions, financial institutions face challenges keeping up with technology change. Consumers are left feeling that their bank doesn’t offer the seamless experiences, value for the money or the innovation they want from their digital relationships.

To create the best possible experiences, banks should consider the benefits of integrating consumer and mortgage lending. Here are the main reasons why they should:

1. Eliminate Silos
Disparate consumer and mortgage lending teams create silos within a financial institution. A unified lending experience removes these silos and can lead to better communication, enhanced cross-sell opportunities and an improved overall consumer experience.

2. Create Better Application Visibility
Banks can streamline the lending process with the ability to access all open applications. This means that if a mortgage applicant has an existing application in progress within an integrated platform, lenders and bankers have visibility across systems.

3. Modernize Application Pre-Fill
Borrowers can save time and reduce errors when filling out new applications with a pre-fill feature. Pre-fill enables mortgage loan officers to access a consumer’s profile from the banking core data and use it to pre-fill a new mortgage loan application. This feature delivers a better, faster and more satisfying consumer experience.

4. Maximize Cross-Sell Opportunities
The consumer experience shouldn’t stop with simply fulfilling a borrower’s initial request. The bank’s system and processes should work to cross-sell and cross-qualify consumers to improve their financial well-being and deepen the relationship.

5. Optimize Consumer Debt
One innovative way that bans can go beyond the initial closing is enhancing customer relationships using a debt optimization approach. This approach reviews the borrower’s outstanding loans to find and recommend refinance options for auto and personal loans to help reduce the borrower’s debt-to-income ratio. This can increase the chances that a borrower will be approved for a better home loan, saving them money.

Integrated consumer and mortgage loan origination systems simplify the digital lending process. Forward-thinking lenders use data to tailor their products to borrowers’ needs, offering consumers the right products and services at the right time to create positive experiences along with additional banking products.

What’s Embedded Banking and Why Does It Matter?

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The financial technology industry is notorious for its ever-changing nature. Silicon Valley’s breakneck pace is enough to make some industry veterans’ heads spin. Advancements in technology and changes in economic incentives can create ripple effects that shift the entire fintech industry at a moment’s notice. It can be a lot to keep up with: Web3, blockchain, crypto, NFTs, buy now, pay later, digital ID, know your customer and anti-money laundering laws, two-factor authentication… the list goes on.

Among the latest fintech phenomena to garner attention is embedded banking, a term that sounds both banal and confounding at first blush. Embedded finance has received some attention, but embedded banking remains a little-known concept among banks that have some of the biggest opportunities in the space.

Embedded banking is a model where banks can provide purpose-built digital services to their customers, including retail and small- to medium-sized businesses (SMBs). Embedded banking enables banks to offer a bespoke technology solution through an open framework that can meet the expanding business requirements of their SMBs customers. As opposed to embedded finance, where businesses access financial services through a third-party platform that is not a specific solution from a financial services company, embedded banking places the bank at the heart of an SMB’s operations. Embedded banking both helps strengthen an SMB’s technology and its relationship to their bank.

Embedded banking is not completely novel. The concept has existed for a few years now, but recent innovations have completely revolutionized the field. Embedded banking is moving from an “inside out” model to an “outside in” model. The inside out model of embedded banking used siloed digital channels per customer segment and direct integration with core banking systems. For example, each individual business segment — like SMB, commercial and treasury management — needed their own separate digital channel. Through an outside in approach, a bank can offer their SMBs one secure environment and a unified digital experience for integrating data from multiple backend systems.

The outside in approach to embedded banking is both more flexible and provides more robust services for customers. Outside in embedded banking also offers the customer an open view of multiple financial institution relationships and streamlines access to a portfolio of services through a unified user experience. This gives SMBs access to a much wider array of services to fit their unique needs, all through the bank’s digital channel.

Outside in embedded banking is the perfect solution for banks that want to provide top-of-the-line financial services in a constantly changing economic environment that requires small businesses everywhere to adopt more efficient technology. Inflation and interest rates increases means money is becoming tighter than ever; small businesses are the most at risk in an economic slump. In particular, SMBs want more payments options and faster access to their cash, while solutions like flexible invoicing options, expedited collection of payments and automated data exchange could become vital for a business’s survival.

Outside in embedded banking represents a chance for SMBs to modernize their digital experiences and streamline operations, and for banks to form stronger relationships with their SMB partners. Banks are perfectly positioned to throw a lifeline to their small business customers. Embedded banking might still be relatively unknown to many bankers, but it may just be thing that helps countless SMBs get through the imminent economic crunch.

Is Your Digital Banking Sign Always On?

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You’ve already heard the promises: The digital revolution is here, and it’s ushering in a new era of profitability, velocity and efficiency.

Or is it?

While you’ve likely seen your bank’s technology budget grow over the last few years, it may be harder to see how that spending translated into gains in business share, customer satisfaction or the bank’s bottom line. You may be hearing from frontline employees that operations feel more fractured than ever before. What’s wrong with this picture?

Your digital experience may be suffering from a chronic case of squeaky-wheel choices as competing objectives elbow for access to finite budget dollars and project resources. Improving online and mobile offerings may come at the cost of enhancing digital lending capabilities. Operational efficiencies — a grab bag that can include any number of disparate automation tools intended to reduce cost and improve productivity — may take dollars away from compliance and risk management. You’re not building your digital business from scratch; you’re methodically replacing and upgrading components across your technology stack. But as long as you still have static data siloes and bifurcated systems in your operational mix, your digital service will collide with stopping points that interfere with a smooth user experience.

Bank transaction supply chains are likely the result of decades-old decisions and solutions so entrenched within the operation that it feels inevitable. Reimagining the end-to-end solution requires a fresh look at some previous assumptions and a fresh look at the ecosystem of fintech partners. Executives need to determine if their providers and partners are willing to collaborate to identify and address digital stopping points.

One of the most revealing questions banks can ask their providers is about their own investment strategy. How much are they putting back into the development of their own solutions? Small, ongoing investments mean that your partners are spending money on things that don’t sustainably deliver benefits to your bank. It also means they aren’t looking ahead to solve the next round of technology challenges. If their CEOs aren’t actively positioning their solutions for future viability, then you may have found the weak links in your own supply chain.

The customers your bank is trying to reach want speed, ease of use and mobile enablement in everything they do, whether it’s one-touch shopping on Zappos or depositing a check into their savings account. While these requirements have defined consumer preferences in retail segments for years, they arguably define consumer preferences in every segment following the quick adaptations the industry made in digital banking in response to Covid-19.

The dream of 24/7/365 banking requires a precise definition of digital: always on. Not “mostly on” until your bank needs a compliance update. Not “pretty much on” until you need to manually advance the loan in the loan origination software or collect physical signature cards. Interconnected services are critical to the always-on digital experience.

Your digital offer should take its inspiration from innovative disrupters outside of the financial industry, like Uber Technologies and Netflix that rewrote the delivery and service aspects of their products with interconnected, cloud-based systems. Your bank needs to be able to deliver to customers, regardless of whether someone is sitting at your service desk. Static and bifurcated systems are, by definition, unconnected, and need human intervention for updates to keep you in business.

As your bank continues to invest in technologies to deliver digital banking, make sure you focus on the end game for your customers. Digital must be as reliable as turning on a light switch. Interconnected, cloud-based systems from partners who are looking forward with you will help you get there more quickly — and with fewer headaches.

The Do’s and Don’ts of Digital Lending Transformation

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For many mid-size community banks, the shift to technology has been slower than expected. There can be a resistant mindset when it comes to implementing financial technology practices, hindering any results that the technology can provide. Bankers try to make the tech fit to their existing processes, rather than the other way around.

If you’re already considering a digital transformation, you might be tempted to run out and overhaul your entire system right away. However, this can be an overwhelming approach, destining the project for failure. One recent study finds that most financial institutions that have partnered with fintech firms have seen moderate gains, but there is still a need to distribute more dedicated resources to a true digital lending transformation. However, there are a few quick do’s and don’ts that every institution can benefit from:

Don’t try to overhaul the entire thing at once. Take an assessment of not only your bank’s current technology state, but also of your current practices and approaches. Too often, financial institutions want to focus on “the way it’s always been done,” rather than looking to see how digital solutions can make processes easier and more efficient. Keep what works in today (and tomorrow’s) environment and find ways to adapt the rest.

Do start with the most profitable areas. One of the best ways to see the most return on an investment in digital is to begin with the areas that drive revenue and profit to the institution. Your back office and credit department will benefit the most from technology that allows them to operate more efficiently and make decisions faster, making them logical starting points.

Don’t try to mix and match solutions. When it comes to implementing technology into the branches, many choose to try and piecemeal different products and systems together. While you might think this approach saves money by only buying certain products from certain vendors, your bank is most likely losing key integrations that can come from having a single solution.

Do trust your technology partners to guide you. Finding a partner that understands what it means to work in a bank, with these current processes, ensures that you’re getting support from folks that understand what you’re trying to do. The key here is trust. Too often, banks are resistant to the idea that their technology partners might be able to teach them a more efficient way.

Don’t try to change the technology. Rather than looking at how the bank can adopt the tech to its processes, consider leveraging technology partners to explore how your bank can simplify processes through technology. When you purchase a solution from a financial technology provider, you’re also paying for their expertise. Don’t throw your money away.

Do adjust your mindset when it comes to tech. Tech in the banking industry has made giant leaps in the last five years, let alone in the decades prior to that. If your bank’s mindset when it comes to implementing or adding technology into your processes is that certain things can’t be changed because it’s always been done this way, you’re setting yourself up to achieve fewer desirable results.

When the coronavirus pandemic sent everyone to their homes for months in 2020, many banks were forced to recognize that an online portal or a mobile app wasn’t going to cut it anymore. Adapting to a fully automated process has become necessary, not optional. Now is the time to learn from this and to take control of your technology. Don’t wait until the next unexpected issue forces you to adapt, when you can get ahead of the game.

About Baker Hill
Baker Hill empowers financial institutions to work smarter, reduce risk and drive more profitable relationships. The company delivers a single unified platform with modern solutions to streamline loan origination and risk management for commercial, small business and consumer lending. The Baker Hill NextGen® platform also delivers sophisticated analytics and marketing solutions that support sound business decisions to mitigate risk, generate growth and maximize profitability. For more information, visit www.bakerhill.com.

Five Ways to Challenge Digital Banks

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Over the past several years, financial institutions have experimented with and implemented new technologies to improve efficiency, security and customer experience. Although online banking is currently challenging traditional banking practices in several aspects, there are ways that traditional banks can fight back. Here are a few key offerings of digital banking, along with ways traditional banks can beat them at their own game.

1. Improved service
Digital banks offer customers 24-hour service and the ability to conduct a variety of transactions in their own time. AI-powered chatbots allows customers to ask questions, perform transactions and create accounts through one platform, at any time. This on-demand service appeals to customers as saving time and effort in their banking experience.

However, one of the key missing components of an online banking platform is human interaction, which can be easier and more rewarding than filling out a checklist on a website. Customers can easily convey any special requests or needs. By providing excellent customer service with genuine and knowledgeable human interaction, traditional banks can offer a more complete service than online banks.

2. Heightened security
To keep up with innovative offerings like video chat and digital account operations, online banks can utilize SD-WAN solutions to maintain reliable connectivity and efficiency for their security needs. Solutions such as antivirus and anti-malware programming, firewalls and biometric and/or facial recognition technology provide additional levels of security to protect customer information.

Traditional banks may less susceptible to cybersecurity threats. Despite online banks’ level of security, their fully-digital presence makes them more vulnerable to cyberattacks compared to traditional banks. It may also be much more difficult to regain what has been lost in the event of a data breach, due to the ways cybercriminals can hide.

3. Streamlined services
Digital transformation is all about streamlining and improving operations; the concept of a digital banking solution is no different. Digital bank users can achieve their banking needs through a single platform. In one “visit,” customers can view their balance and recent transactions, transfer money between accounts and pay bills. Some digital banks also have the option to sync accounts with budgeting apps to further manage budgets and spending.

This streamlining allows digital banks to significantly reduce the number of different products and services they offer. By comparison, traditional banks can provide many more services and options to better fit the individual needs of their customers, and make sure they feel important and well looked after.

Moreover, traditional banks should not feel the need to provide all these services in-house. There are plenty of fintech partners they can lean on, with very specialized capabilities in these services, to help diversify their products and services.

4. Cost-effectiveness
There are often various costs associated with banking, both for the institution and the customer. The low overhead of digital banking allows for a significant reduction in cost and fees and may offer lower-cost options for individuals interested in opening multiple accounts.

Reducing costs may also mean reducing services and, at times, customer experiences. There’s no such thing as a free lunch; the less a customer pays, the less they may get. Many community banks offer more products and services, as well as helpful staff and peace of mind for small financial cost.

5. Environmental consciousness
Working to become more environmentally friendly is becoming an important step for all institutions. Digital banks are succeeding in reducing their carbon footprint and overall waste.

Many traditional banks are making great headway in becoming more environmentally friendly, and have the added benefit of making these changes optional. Many of the customer-facing changes can be approved or rejected by the customer, such as electing paperless statements, giving them more control over their banking experience. Digital banks are challenging traditional community banks in many ways. But community banks can leverage the substantial competitive advantages they already possess to continue providing a greater and more comprehensive experience than digital banks.

Three Ways Directors Can Solve the 3,000-Year-Old Credit Problem

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credit-7-9-19.pngHistory has shown that knowledge is power. One place that could use the benefit of that knowledge is commercial credit.

Banks have been lending to businesses for 3,000 years and has yet to figure out the commercial credit process. But executives and directors have an opportunity to fix this problem using data and digital capabilities to make the process more efficient and faster, and become the lending legends of their institutions.

In 1300 B.C. Egypt, the credit process looked something like this: A seafaring trader would trade bronze bowls with a local bronze merchant for cloth and garments. But to make this transaction, the bronze merchant would need to borrow from multiple merchant lenders. This process required lenders to understand the business plans of the borrower, go “door to door,” have community knowledge and know the value of all those goods. There were a lot of moving pieces—and a great deal of time—involved for that one transaction.

Fast-forward to today. A lot has changed in 3,000 years, but the commercial credit process has actually gone backwards. It can take a lender 60 to 90 days and more than $10,000 per lead to identify potential leads—and that’s before they review the application. After a borrower applies, the lender must look up credit reports, collect and spread financial statements and decide on the terms and conditions. Finally, the application goes through the credit department, which can take another 30 to 45 days and cost $5,000 per application.

Lenders will have spent all that time and effort to process the loan—but may not end up with a new customer to show for it. Meanwhile, borrowers will have spent time and effort to apply and wait—and may not have a loan to show for it.

While this problem has persisted for 3,000 years, the good news is that executives and directors have an opportunity to fix the problem by turning their manual-lending process into a digital-lending one. This evolution entails three steps that transform the current process from weeks of work into days.

First, a bank would use a digital-lending portal to gather applicable demographics to identify prospective borrowers. In researching prospects, they see critical borrower information such as name, address, years in business, legal structure, taxpayer identification number, history, business description and management team. Rather than having to wait until later in the process to uncover this critical information, they can immediately identify whether to pursue this lead and quickly move on.

Second, a bank uses a credit-decision engine to gather and analyze the applicable borrower data. Not only can the engine pull in consumer and credit bureau information, but it can also include automated financial collection, credit score and industry data for comparison. The bank can use data from this tool to determine terms and conditions, credit structure, purpose of credit facility, pricing, relationship models and cross-sell strategies.

Third and finally, the bank’s credit policy and process integrate with its credit-decision engine to enable an automated review of a loan application. This would include compliance checks, terms and conditions and credit structure. Since the data gathering and analysis has already taken place and automatically factored into the decision, there is no need to review all those pieces, as would be required with a manual process.

These three steps of this digital lending process have distilled a weeks-long process into about five days. Executives and directors can not only grow their institution in a shortened time period; they can do so without adding any risk. A bank I worked with that had $250 million in assets was able to add $20 million in loan volume without taking on any additional risk.

By using knowledge to their advantage and implementing a digital lending solution, bankers can save not just time and costs, but their institutions as well as their communities. They can now spend their limited time and resources where they matter most: growing relationships along with their banks. Having fixed the 3,000-year-old credit problem, they can place those challenges firmly in the past and focus on their future.