Custom Loan Management Software: The Risks and Rewards
You’ve been reading the press and watching the trends—perhaps even seeing them in your own business. It’s increasingly an above-the-fold story, told by many respected financial news outlets: upstart financial technology firms are making deep inroads in the commercial lending industry and disrupting what had been a stable, lucrative income stream for traditional lenders. Not surprisingly, strategy and operations leaders at these financial institutions are trying to erect barricades around their businesses before their customers gravitate towards their more agile competitors.
The Inspiration to Innovate
What makes these competitors so nimble? They’re embracing innovative technology. More specifically, they’re relying on automated loan origination software that streamlines the lending process, improves their customers’ borrowing experience, and boosts their profitability. They’ve analyzed how much outdated manual processes add to the cost of commercial lending, both in terms of labor, speed, and customer satisfaction. But they have another thing going for them. They’re brand new. They have no old ways of doing business to cling to. No legacy systems to consider. No employees who are hesitant to change.
For large, established lenders, the road to revolution—and we don’t use the word lightly—can be quite a bit rockier. Financial institutions, in general, aren’t known for making impulsive decisions. And they’re not apt to fix something that isn’t obviously broken—particularly when the fix involves a significant change in their day-to-day practices. But when their profitability is at stake—when even established customers are taking their borrowing business elsewhere, and banks see other lenders chipping away at their competitive advantage, they may begin to think differently. That’s often when a 100% digital loan management platform becomes part of their consideration set, and the question becomes, “What’s the best-automated loan origination system for me?”
Lenders Have Choices
As a leading provider of automated lending solutions, Biz2X is well-versed in how the decision to innovate—or to stick with a legacy system—gets made. One of the first considerations banks that haven’t transitioned to digital lending is how digital transformation will impact their day-to-day operations. How will adopting a digital lending platform change their employees’ responsibilities and routines? And how will the implementing change affect their culture overall?
Some organizational leaders who are willing to embrace new technology as the path to capturing more business will decide to engage a financial services consultant with expertise in digital lending to help them chart the course toward change. So begins an analysis of the financial institution’s manual processes, including evaluating how much loan processing costs an institution. How many employees touch each loan application they process? How much time does it take to get from loan inquiry to closing? A consultant will also examine the effectiveness of an institution’s marketing efforts. They’ll investigate how many small business borrowers who visit their websites will request more information on commercial loans. How many will go on to request and complete a loan application? How many will bow out midway through the process? In other words, what is a financial institution’s actual conversion rate, and where lie the obstacles to closing a loan?
Chances are, the consultant will conduct interviews with the lending institution’s key employees. They will try to uncover which parts of the company’s legacy loan management system are working well for loan officers—the features they’re attached to and would balk at having to abandon—and which, by contrast, are pain points they feel they must live with. A consultant will examine whether an institution has the dedicated IT support it takes to implement high-level change. A consultant will also check in with your Chief Compliance and Chief Risk officers to determine how best to streamline the underwriting process, from credit scoring to KYC compliance. Workflows, decision making, customer relationships, and CRM systems will be placed under the microscope. A consultant worth their salt won’t just talk to senior management, but also workers in the trenches. It’s a time-consuming process many consultants take a year or more to complete. Needless to say, at several hundred dollars per hour, consultant fees can add up quickly.
What Happens Next?
When all is said and done, an effective consultant will develop a detailed road map towards digitization. They won’t design the engine that actually gets you to your digital destination, though. That’s the job left to a custom lending software developer. Most bank executives don’t have the software experience—or even the time—to evaluate the credentials of a software design firm. They rely on the consultants they hire to appraise whether a firm has the resources, fintech experience, cybersecurity expertise, and other qualifications to ensure a well-designed custom product. That’s a lot of trust to put in one individual. And where there’s trust, there’s risk.
Designing a customer digital lending platform takes time—thousands of hours, in fact, particularly when you include days spent designing a compelling user interface and testing the platform. Most financial institutions are looking at a minimum six-figure investment at the outset. But unfortunately, custom platform design costs are legendary for overruns. Project pricing can be imprecise.
By way of example, a study by McKinsey and Company revealed some unnerving figures. Based on a review of more than 5000 IT projects, the research firm learned that two-thirds of all enterprise software projects are subject to cost costly surprises. Delving deeper, McKinsey found that a third are not delivered by their scheduled completion dates. And 20% of IT projects fall short of expectations and leave the companies that commission them dissatisfied. These are serious risks financial institutions must take into account when budgeting for digital transformation and managing their teams’ response to new digital business processes.
The Ongoing Costs of Custom Digital Lending Platforms
Financial institutions need also be aware that their investment doesn’t end when they launch their lending apps. There’s the inevitable tweaking: bugs, bottlenecks, and general bothers to be eliminated. What’s more, the lending industry is subject to constant change, including new rules that must be integrated into a digital lending platform for a lender to remain compliant and avoid the penalties levied when their activities don’t mesh with current regulations. The penalties paid by financial institutions amount to a staggering sum of money: worldwide, banks paid some $15 billion in fines in 2020 alone. More than 70% of that burden was borne by US institutions. And if that’s not scary enough, it’s not just banks and credit unions who pay the price. In recent years, individual employees have also faced stiff fines for failing to meet compliance standards.
It’s incumbent on banking leaders to budget for system updates, whether the need for them arises out of legal mandates or changing market conditions. Managers must also take scalability into account. When their businesses take off—a likely result of adopting digital processes—will they be able to keep up with their own success? Custom systems demand custom care and maintenance, which can come at frequent and high costs.
Looking at The Big Picture
The process of implementing a custom digital lending solution comes with inherent obstacles and risks. That’s the unfortunate news. The great news is that well-conceived change, while it may be momentarily unsettling, is also rewarding.
Historically, the operational efficiencies financial institutions gain by going digital have proven profound and contribute to lenders’ profitability in both obvious and subtle ways. Lenders who automate, quite simply, can serve more customers more inexpensively than financial institutions that rely on manual processes. They’re in a better position to limit the risks and costs posed by faulty decision making and non-compliance. They offer customers a better experience—one that they’re increasingly demanding as the world grows more impatient. They’re earning repeat business from satisfied borrowers: business that extends to financial products outside of lending.
If the prospect of transforming your operations through custom loan origination software feels like too big and chewy a bite to take, you do have options. Biz2X has designed a digital lending process that offers many of the benefits of a custom solution, including speed, cost reductions, enhanced risk management, scalability, and a user experience that’s fine-tuned to the needs of today’s small business borrowers. Our platform is comparatively much less expensive than custom solutions and, contrary to what you may have heard about shelf software, affords lending institutions ample opportunity to customize. We’ve studied the commercial lending industry carefully and included the smart customization features that can genuinely have an impact on your business. And we remove the burden of maintaining your lending platform by continually improving our products so they meet regulatory demands and address market trends. Schedule a conversation with us today to see whether our platform, which currently drives thousands of commercial lending enterprises, makes sense for your financial institution.