According to a McKinsey & Company report, commercial lending software continues to push the digitization of lending forward. For the financial institutions that are already there, the digitization of lending workflows has positively impacted the bottom line. Commercial lending, retail banking, and business banking all have this opportunity in front of them. The software allows lending businesses to make quick credit decisions using customized credit risk profiles, enhance customer experience by implementing full automation or more basic human enablement, and make workflows more efficient to lower costs.
The backbone of the digitization of lending is software. We review key types of commercial lending software that bankers should be using in 2023, the automation spectrum from full automation to human enablement and how it impacts both commercial and business lending.
In this article, we will cover:
- Key types and features of commercial lending software
- Prominent software vendors
- Using different levels of automation for SMB loans and commercial loans
Key types and features of lending software
Commercial lending software comes in many different flavors and has a wide range of functionality. There is an impressive depth and breadth of software solutions in the space addressing both small and large components of commercial lending workflows. There are even SaaS lending platforms that provide a combination of software and connectivity to 3rd-party data integrations/partnerships to manage the entire process from one screen with multiple modules and dashboards.
The benefit of having many software options is that a commercial bank can roll out a solution for wherever they are, or for wherever they are trying to go, in their digital transformation. Below is a list of types and key individual features of commercial loan software that bankers should be using to improve lending operations. Most individual features that we discuss are included in certain software solutions, but important enough to call them out in our list.
In addition to types and key software features, we also discuss top vendors in the space by leaning on data from Capterra, a leading website for software reviews and research. The vendors mentioned are all highly rated.
Commercial loan origination software (including loan management, loan servicing software, and all-in-one commercial lending software platforms)
Loan origination software (LOS) adds an infrastructure around the loan origination process from the application, to applicant verification, to processing fund disbursement. Banks can manage the loan lifecycle from disbursements to pay-offs. There are varying degrees of LOS software and some extend to the level of a software platform. A software platform is one turnkey lender system to rule the entire lending process. A platform combines software and 3rd-party data integrations serving up the entire commercial lending loan life-cycle on one screen. The benefit of a fintech platform is having everything under one roof which can fully digitize your loan origination system and lessen the administrative burden of multiple systems, multiple logins, etc.
The best kinds of loan origination software will natively integrate components or entire solutions from the remaining top software types listed below. For example, Biz2X marries components of CRM, Document Storage/Management, Compliance and Risk Monitoring with the core Loan Origination Software into a single platform, which makes the platform more convenient for bankers as it offers access to multiple systems that are involved in the lending workflow all in one place.
Customer relationship management (CRM)
CRM platforms allow banks to nurture customer relationships using a blend of automation and human enablement. From simple tasks like sending customers the latest newsletter that discusses the impact of interest rates, to prompting a relationship manager to manually reach out, to an automated, highly personalized outreach cadence to nurture and expand accounts. CRM platforms add a communication infrastructure and management system around existing accounts. CRMs can also nurture prospective borrowers who have engaged with your brand online. For example, if a prospective borrower filled out an online form requesting loan rates and pricing but never initiated the application process, the CRM would be able to capture that information and then automatically send them a follow-up communication.
Monitoring & risk assessment
Risk analytics covers credit decisions, risk assessment, and ongoing credit risk monitoring. Banks can use data from these vendors to make better “yes decisions” and relationship managers can stay on top of high-profile accounts (or automatically stay on top of all accounts) with real-time monitoring to identify accounts that might be at risk of default. By serving up real-time data on credit and cash flow to the teams who need it the most, commercial lending banks can proactively engage with at-risk accounts.
Customer identification/customer data
Critical software to help instantly verify a customer’s identity. Financial institutions need to understand who they are doing business with, and without software in place this can be a challenge at scale.
Electronic signature software can speed up the application process compared to requiring a borrower to physically come into the branch for a wet signature. eSign software solutions are compliant, secure, scalable, affordable, and a customer favorite because you save them a trip to the branch.
Internal document storage related to the commercial loan process. Not to be confused with data hosting/customer data storage, document management relates to internal documents such as meeting notes and presentation slide decks regarding your digital transformation journey. Cloud-based storage providers allow team members to access files from any device.
Due to the sensitive nature of the data collected during the loan application process, commercial lenders need a reliable, secure solution to store customer data. This boils down to three options: cloud-based, on-premise, or a hybrid approach. Depending on the type of borrowers, and regulations around lending to those borrowers, you might need one or several hosting solutions to support your hosting needs. Cloud-based hosting vendors can be beneficial because they can scale and grow with you. Hosting providers can also integrate with software solutions for automated data storage.
Cloud-Based Hosting Vendors:
Using different levels of automation for SMB loans and commercial loans
Commercial lending differs from small and medium-sized enterprise (SME) lending for several reasons. The biggest reasons are volume, complexity, and loan size. Generally speaking, loan providers have a higher volume of small business loans, which have less complex approvals (but more complex in other ways, more on this later) and have smaller loan amounts than commercial loans. Because these two loan segments require different risk management strategies and banks offer different lending solutions, it makes sense to have two different approaches to automation. From full automation to simple human enablement, the software approach to these two loan segments should flex to meet the personalized needs of the bank - and it can!
Small business (SMB / SME) loans
Smaller-sized loans but a higher volume, SME loans are ripe for a more automated approach. A higher volume of loan applications can bog down a bank with a non-digital approval process. Relationship managers and underwriting will need to follow up with applicants throughout the loan origination process for various documents, credit inquiries, data, etc. Processing loans manually at scale is complex, slow, and comes with a high administrative burden. A digital, automated approach promises that certain SME loans can self-serve, and have a credit decision-making algorithm make approval decisions in real-time, dramatically reducing the time-to-approval and time-to-cash, all of which can lead to increased profitability. All of the credit-scoring automation can be customized to the bank's risk profile specifications. While the more complex business loans can be passed on to relationship managers for a human review.
Smaller financial services like community banks and credit unions might not have the employee headcount to meet demand or the added administrative burden of SME loan portfolio management at scale. This is another area where the software can come in as it can augment the human staff giving them the technology infrastructure to scale while maintaining quality standards.
With larger loans but a lower volume, banks can use software to augment their relationship managers and automate segments of the business. For instance, certain lines of credit renewals in a commercial book might be very low risk and can be fully automated, or serve up the latest data to a relationship manager enabling them to make a quick decision. The goal here is to streamline what can be streamlined while giving more power - in the form of up-to-date and accurate data - to relationship managers to handle the more complex loans.
Where to start with commercial loan software
As we mentioned earlier, the software and automation solutions that already exist in this space are robust. Wherever a bank is in its digital transformation journey, there is a solution available. However, where should you start? There are a lot of roadblocks and pitfalls in a highly regulated industry and just getting started somewhere is not a good idea. The reality is a bank will need buy-in from many stakeholders to drive this forward. For additional information on getting buy-in, see our related article titled Six Things to Do Before Selecting a Business Banking Platform.
Let’s assume at this point in your digital transformation that you have buy-in, and the team is ready to get started. What does step one look like? Step one should be detailing the end-to-end customer loan acquisition journey, including the internal workflows to support each step in the journey. Leave no detail undocumented. Here are the reasons why you want to start here:
- Identify High-Level Digital Transformation Opportunities: Identifying the overall opportunity is an important step to get and keep buy-in and excitement for the bank's digital transformation. Having a “north star” in place will be important to maintain momentum as digital transformation projects can take a long time.
- Identify Automation Opportunities: A more tangible look at specific opportunities within business segments. Business segment leaders can support this effort and will surface pain points as potential automation opportunities.
- Identity Testing Opportunities: The highest-impact opportunities from above should be prioritized as they can show bank stakeholders tangible results the fastest with an early test or beta launch.
- Identify Minimum Viable Product (MVP) Opportunities: Take the highest-impact testing opportunity and craft a minimum viable product to test it. An MVP is a “beta solution” that goes live with the minimum amount of features that are required to show the impact of digital transformation with a real-world test. The key with an MVP is to lower the complexity and feature set to the minimum. Inform stakeholders of what features will be included upon successful testing and roll out.
- Identify Roll out Opportunities: Once the MVP has conducted a real-world test and data is gathered, detail what a “V1 solution” will look like and the impact it will have.
This 5-step process should be repeated for all of your business segments (and sub-segments) that can be impacted by digital transformation. It is OK to start with a small scope and gradually increase it using this process-driven approach. Scope creep, or when business requirements get larger and larger, can derail digital transformation projects as stakeholders expect too much too quickly. This controlled approach can set and manage realistic expectations.
Using commercial lending software to enhance relationships
We covered a lot of commercial lending software that bankers should be using in 2023. With soaring customer expectations, the need for banks to embark on a digital transformation is critical. An important point to call out is that software and automation are not intended to replace relationships that banks have with their customers but to enhance them. Customers want a personal touch and a good software and automation infrastructure can do that. Commercial lending software can serve up the latest data to your relationship managers allowing them to provide a personalized experience while allowing you to scale and expand with preferred risk.