The first loan origination software was introduced in 1998. That digital transformation ushered in a period of profound change in commercial lending and other industries where predictive modeling and risk management are key to a financial institution’s profitability. Banks, credit unions, life insurance companies, and credit organizations of all kinds slowly discovered the advantages of automation. Digital underwriting made quick work of various time-consuming manual processes for consumer and commercial lenders, from application intake to credit decisioning to pricing.
The adoption of tools that are driven by artificial intelligence has been gradual. Some people trust it—some not so much. But the personalization and convenience that AI and machine learning bring to the customer experience are slowly moving customers toward acceptance. And now, like it or not, machine learning is a mainstay of buying every manner of product. Lending institutions and insurtechs continue to embrace digital underwriting as a solution to problems they’ve grappled with for years, particularly during the early years of the pandemic when loan applications reached record levels. Digital lending software is that good. And it’s getting better all the time.
Let’s take a look at some of the advances and trends we’re seeing during the modernization of digital underwriting technology.
Trend #1: More Robust Borrower Analysis
How much do you want to know about a borrower before loaning him or her money or issuing a life insurance policy? The best automated loan origination platforms can tell you more than ever before, by pulling from a wider range of third-party data sources, The insights derived from these sources range from financial to personal. Digital lending platforms can retrieve Secretary of State reports on a borrower’s business. They can perform license audits on businesses that require professional licensure. That’s a pretty long list that includes many large and small businesses, such as hair salons, accounting firms, construction companies, and insurance agencies. They can also amass information on how successful a business is likely to be by drawing from consumer review sites and social media platforms. A business that is active on social media and garners a lot of positive reviews from customers on the Better Business Bureau website, Trustpilot, and similar rating sites is more likely to thrive—and make their loan payments on time.
Traditional underwriting slows down the process of gathering all of this data and, in some cases, denies you valuable information. Few loan officers have the time to comb through unstructured data, such as Facebook profiles, Instagram accounts, and Better Business Bureau ratings for every borrower they serve. By speeding up your workflow, you can better meet customer expectations for a swift, friction-free financial transaction.
Trend 2: Customizable Qualification Rules for Online Loans
Ultimately, the decision to lend money to a business, whether through a business line of credit or a commercial mortgage, is unique to each financial institution. That’s why the best loan origination platforms allow lenders to set their own, fully customized risk assessment parameters. You may want to balance low-risk, medium-risk, and high-risk loans in your portfolio. Each kind of loan can earn you money when you apply intelligent pricing. But your institution may be more or less risk-tolerant than another. Automation of risk management and pricing can show you multiple loan scenarios to compare. Of course, you want to be profitable. But there are many paths to profitability. Loan origination software and, more specifically, its automated portfolio management and risk selection features, can help you decide which one to take.
Trend #3: Advances in Digital Underwriting
A powerful—and empowering—digital underwriting function is the cornerstone of automated lending software—the feature that saves lenders and borrowers the most time and ensures the highest level of accuracy in loan decision-making.
There’s an underwriting transformation going on. Today’s digital lending platforms draw from a wider range of borrower document submissions and third-party data than ever before, including some that are considered “alternatives” to the usual big data sources. Why is drawing from alternative data sources important? Borrowers are quick to assure you that they’re more than their FICO scores. And it’s true. Some 62 million Americans have what’s known as a thin credit file. Another 20% have no FICO scores. And yet, they may still be worthy of credit, particularly when pricing is appropriately adjusted. Digital underwriting, when used carefully, can open the door to more business for your institution and credit access to traditionally underserved communities.
What kinds of data might you be able to consider through digital underwriting? The list is pretty long and includes property ownership, rental history, employment records, utility payments, and information from specialty credit bureaus. Specialty credit bureaus report on everything from payday loans to medical payments to insurance claims and provide a much richer borrower profile.
By drawing on non-traditional data sources, digital underwriting can also help you weed out identity fraud, keeping you compliant with KYC regulations. And speaking of compliance, digital underwriting can also ensure you’re covering all the bases, including fair lending regulations. Digital underwriting can correct bias in decision-making—imbalances in your lending decision history you may not even be aware of.
Digital underwriting isn’t just benefitting lenders. Insurance industry players, whether issuing life, homeowners, or auto insurance policies, can process more applications more quickly—and with reduced risk—by accessing more varied data, too. Digital underwriting is leveling the playing field, making insurtechs more competitive with the (former) big guys in the industry. Incumbents no longer enjoy so great a competitive advantage because upstart companies can draw on the same available to competitors in real-time. Digital underwriting is a ticket to new business.
Trend #4: Straight-Through Loan Processing
The most comprehensive digital lending platforms save loan officers’ time at every stage of loan processing, from application straight through to funding. They also show respect for borrowers’ time and take into account that quick funding can make a life-or-death difference for businesses that are under duress. We saw a lot of that during the pandemic, of course.
Straight-through loan processing (STP) is a customizable feature of loan origination software. By working closely with a lending software’s developer, customers can customize the criteria for when they want a loan to be completed with no or minimal human intervention. That’s another example of how spending a little time at the beginning of a journey can hasten your arrival at your final destination.
Effective commercial loan decision-making necessitates taking many factors into account, including Internal Rate of Return (IRR), Loan to Value (LTV) Ratio, and Debt Service Coverage Ratio (DSCR). STP harnesses all of this data through automation. STP integrates When a borrower meets your predetermined thresholds for these factors, STP takes over, delivering greater efficiency and, in turn, higher profitability to your institution.
Trend #5: Instant Loan Decisioning
Taking our #4 trend to its logical extreme, instant loan decisioning is a new area to watch as some institutions are deciding to fully automate credit decisions for some small business borrowers. Sometimes companies are so creditworthy you wouldn’t think of denying them a loan. But when you employ manual processes to make “no-brainer” decisions, you’re wasting precious time. Digital underwriting solves this problem through artificial intelligence. It allows you to set specific qualification standards, across many decision-making criteria. When the software identifies slam dunk customers, it can be set up to instantly approve their applications. That’s instant loan decisioning in a nutshell. When a potential borrower meets the high lending standards your institution has set, you don’t want it to get away. Instant decisioning makes sure that customer doesn’t walk out your door due to slow processing of his or her application. Capturing and delighting low-risk borrowers is another way boost your institution’s profitability. By providing an efficient customer experience, you can also improve your customer retention rate.
Trend #6: Save Time and Money with Digital Site Visits
Lenders have a lot of reasons to visit a borrower’s property during the loan decision-making process. First impressions count and this is one case where you might want to judge a book—a retail store, for example—by its cover. Is the business located in a high-traffic corridor? Is its parking lot big enough to accommodate more customers if a business flourishes? How effectively does a company merchandise its products?
Site visits are among the more time-consuming tasks lenders have to undertake. Traffic patterns and demographic statistics can be useful in predictive modeling, but seeing a business with your own eyes can teach you a lot. If you have your sights set on being a nationwide lender, in-person site visits may be too costly to undertake. But even if a borrower is local, who has the several hours a thorough site visit takes to spare?
Digital site visits provide a time- and cost-saving solution for your financial institution. Professional property inspections of a customer’s facility or construction site can also be managed virtually, now, as more and more certified commercial inspection firms embrace digital site visit technology. Digital lending software can reduce your site visit costs by as much as 80%.
What Does the Future Hold for Digital Underwriting?
The changing needs of commercial lenders drive relevant, carefully considered innovations at Biz2X. Our product developers are dedicated to supporting the most important work you do, from assessing borrowers’ solvency to combatting fraud to helping you reach a broader range of small businesses. As more and more lenders look for ways to improve their underwriting process with digital tools, you need a partner who understands the power of process automation to make you more successful.
Find out how the innovations we are building at Biz2X can help you deliver more profitable business lending to your institution. Schedule a demonstration of our business lending platform today to learn how you can save time and achieve industry-leading results from your underwriting decisions.