How can digital accelerate loan originations and drive faster growth for banks?

The commercial lending sector is becoming rapidly more complicated as demand peaks, and more alternative players enter the market. In 2019, a survey revealed that the US’ commercial loan landscape was incredibly diverse, with borrowers opting for bank lenders, non-bank lenders, Collateralized Loan Obligations (CLOs), and Business Development Companies (BDCs) – making up a whopping $1.2 trillion in value. As a result, institutions are eager to reimagine loan origination to streamline the customer experience and prevent prospective borrowers from switching to a competitor/alternative platform.

40% of consumers say that non-banks can better assist them with their needs, indicating a genuine threat to incumbent lenders. There is an approximately $5 trillion funding gap between the financing needs of SMBs and institutional loans available to them, which is one of the core reasons behind their growth.

In this climate, an accelerated loan origination process with minimal bottlenecks and speedy approval can help to capture and retain customers. The banks can achieve this by driving the digital transformation of the loan origination process, thereby reducing manual interventions dramatically.

Traditionally, loan originations would be fraught with myriad complexities, as the bank/lender would look at multiple parameters to assess risk, identify the best channels for credit disbursal, evaluate the debt to income ratio (a prolonged process for mid-sized to large organizations), and factor in additional determiners such as a relationship-based pricing rate. This step would be followed up by an appraisal of loan collaterals, paper-based/spreadsheet document preparation, and disbursal in line with ever-changing regulatory norms.

Digitalization has the potential to change this completely. It makes the commercial loan origination process primarily automated, requiring human intervention only when cognitive decisions are to be made. It even allows banks to take advantage of mobile devices so that consumers can share data at their convenience. Digital loan origination could connect with other disparate systems (CRM, historical records, underwriting platforms, etc.) to extract data, make decisions based on business rules, and map trends over a specific period.

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By studying these trends, banks could plan future offerings and ensure that they provide a compelling value proposition as compared to their competitors in today’s diverse marketplace.

While digital commercial loan origination has been around as a concept for a while now, two trends have propelled its recent popularity. First, is the rise of challenger banks and lending platforms to bridge the financing gap, particularly for SMBs. These companies aren’t held back by the legacy technology landscape, which characterizes incumbents, making it easier to provide a seamless, faster, multi-channel experience to borrowers. In an attempt to level the playing field, traditional borrowers can leverage the vast repositories of data that they have built up (a competitive advantage not available to challenger banks during loan origination).

Second, advancements in artificial intelligence (AI) and related technologies such as optical character recognition (OCR), machine learning (ML), and natural language processing/generation (NLP/NLG) have made digitalization viable at scale. OCR can extract alphanumeric data from unstructured sources and auto-populate forms/documents. IoT is another essential lever, as IoT-embedded drones could remotely assess commercial property at the time of collateral assessment. Today, these technologies are widely available, making a digital loan origination process extremely ROI-friendly.

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READ MORE: Case study | US-based financial services major reduces lending cycle time from 16 hours to 10 minutes through Birlasoft’s One Touch platform

Recognizing this opportunity, several companies are doubling down on their investment in next-gen loan origination. Last year, the AI platform Blooma raised $2.75 million to transform commercial loan origination. Interestingly, early users say that they have been able to reduce loan origination time and costs by as much as 75%. By partnering with such providers or developing homegrown solutions, banks and traditional financial institutions can leapfrog into the digital era and reimagine the lending business a whole.

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