The Role of Instant Decisioning in Commercial Lending
Instant decisioning? Real-time lending feedback to commercial clients? If your financial institution has never used automated loan origination software, that probably sounds like an overpromise. Hours of research and document analysis are part and parcel of the traditional loan application process. In commercial or business lending this only becomes more important. So how can any kind of automated decisioning process—no matter how technically advanced—replace all that? And if it can, is that really a good idea?
In this article, we’ll dig deep into the hype and the real promise of automated loan decisioning, and even instant loan decisioning (yes, instant) in the business lending industry.
What Does Instant Decisioning Actually Mean?
It’s surprising, but instant decisioning has become the norm in multiple loan categories these days. Auto finance companies, mortgage lenders, financial institutions that offer credit cards, and some small business lenders have all harnessed the power of machine learning to zero in on the right lending decision with rules and algorithms. To borrow a common phrase, with such a robust endorsement from the financial services sector, it can’t be all bad. Automated lending platforms do hold promise to benefit customers, banks, credit unions, and fintech companies alike.
But if you’re a member of your financial institution’s loan origination team, the term “instant decisioning” may signal a dangerous lack of control in the lending process. After all, how will proper KYC or AML policies be implemented if loan decisioning is happening through automation? It may sound positively reckless to your ear. But once you pull back the curtain on instant credit decisions and understand how this can really work in practice, you’ll find that there’s a lot more control in these processes than you initially expect.
You’re in Charge of Lending Rules
Instant decisions in the lending process are based on rules. These rules include Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) policies, as well as customized risk management rules, such as industry limitations. With automated loan origination software, financial institutions like yours get to set those rules, as conservatively as they wish.
Another important fact is that lenders can customize the rules engine to be as automated as desired. Most consumer and small business lenders use a rules engine to determine which loan applicants immediately qualify for instant loan decisions, and which need more screening. But when a borrower is knocked out of the instant loan running, they’re not tossed aside completely. Their applications are simply flagged for further manual review.
Other lenders use their rules engine for hybrid underwriting. They let automation provide a first pass at a loan decision by recommending an appropriate loan amount and corresponding interest rate. Then, the underwriter can step in and double check the file to ensure that the decision is in fact the right one.
Gain Greater, Faster Insight into Commercial Loans
The data integration feature of automated lending software pulls customer data from multiple resources, including credit bureaus, bank and credit union statements, cash flow history, earnings projections, and collateral accounts to assess a new customer’s risk profile. Automated platforms typically return a concise scorecard on every loan applicant. The best platforms also include a wide range of APIs that preserve access to legacy systems, thereby maintaining the value of the data you’ve already amassed.
From loan application to underwriting, lenders can set precise thresholds to fine-tune risk management throughout the lifecycle of each loan. In addition to setting rules for each credit application your financial institution reviews, such as minimum credit scores and maximum debt-to-income ratios, you can also set credit decisioning rules around your entire lending portfolio, such as overall approval rates. You can set appropriate defaults for each risk management factor, while having the freedom to make exceptions, too.
Overall, instant credit decisioning solutions bring greater consistency and accuracy to your decision-making, by limiting human errors and removing bias from the process of assessing credit risk.
The Human Factor in Automated Small Business Lending
Sure, instant decisioning promises speed. But lenders might wonder if machine learning can duplicate the best aspects of the “human factor” in crediting decisions.
Here’s one example. Experienced loan officers can learn quite a bit by studying borrowers’ financial data. They tend to look beyond the cut-and-dried numbers credit bureaus provide. They take the time to comb through a loan applicant’s credit report, mining important details to inform their lending decisions. For that matter, they can look new customers in the eye. They consider all of the objective data, available. But there’s something to be said for the gut feeling that comes with years of financial services experience. Sitting down with a small business owner can be pretty revealing.
But instinct cuts both ways. Arguably, gut reactions are driven by biases that have no real place in the loan decisioning process. Just because a loan applicant kindles fond memories of your little sister, doesn’t mean she’s the most creditworthy candidate. Some biases are unconscious. They may lead to racial or gender discrimination in the lending process—something every bank, credit union, or fintech business needs to guard against, of course. Instincts need to be recognized, understood for what they are and, in many cases, tempered to keep credit decisioning smart and, above all, fair. By its very nature, instant decisioning injects a critical level of objectivity into the lending process.
But What About Client Relationships?
Instant credit decisioning doesn’t undermine customer relationships and, in fact, has the potential to strengthen them. For some applicants, funding time is of the essence. Not to put too fine a point on it, but quick approval and underwriting can meet emergency business needs that may have life or death consequences for a business. Business owners who can’t meet payroll due to a cash flow disruption may find their employees walking out the door. A piece of broken equipment can halt manufacturing, causing loan applicants to break their promises and miss out on orders. That’s not the kind of customer experience any business wants to offer a loyal or new customer.
Instant credit decisioning, with its streamlined workflows, also gives loan officers the precious gift of more time: hours they can use to focus on the more personal aspects of lending relationships:
- They can devote their energy to building greater insight into their overall lending business and business processes.
- They can use the extra time they gain to manage social media, sharing relevant content on such sites as LinkedIn, for example. Many customers expect lenders to be active on social and judge the user experience you offer in part on how well you communicate through electronic media..
- They can organize educational events that potentially attract new customers and make their financial institutions more visible in the community.
- After closing on a loan, they can reach out to loan applicants, either with a friendly check-in or with the purpose of gathering feedback that can help them further polish the customer experience they provide.
- They can focus on seeking referrals and winning new business.
Who Benefits from Instant Loan Decisioning?
In short, banks, credit unions, credit card companies, fintech lenders—and their customers.
In the lending business, all parties to a transaction want quick answers. Even loan applicants who are turned down appreciate a speedy yay or nay. Businesses that are turned down for a loan have options. Loan officers can enhance their customer relationships by explaining a loan applicant’s choices:
- Should they try to borrow less money?
- Should they wait to borrow until their businesses are better established?
- Should they try their luck again with another lender?
- Should they accept a loan offer with a higher interest rate and budget for a higher cost of carrying debt?
- Should they take the time to do some credit repair before re-applying for a loan?
For lending institutions, automated loan origination software that incorporates instant credit decisioning provides a critical opportunity to fine-tune their lending parameters. They can set standards that suit their appetite for risk. They can customize instant decisioning for a range of loan products, from small business loans to mortgages. Large financial institutions that offer a wide portfolio of products can manage underwriting across all of them with greater consistency and accuracy through instant decisioning. Or they can choose to disable instant loan decisioning entirely for a particular type of loan.
From speed to accuracy to flexibility, the best automated loan origination platforms create a win-win company culture. Far from diminishing the potential for relationship building, the right technology can enhance it, allowing lenders to ultimately build a larger, happier customer base.