How technologies rewrite the lending process

How technologies rewrite the lending process

By Jingyao (Jing) Qiu

Most Americans are in debt, according to the average U.S. debt portfolio from Comet. And the Federal Reserve Bank of New York has found that the average U.S. household debt continues to rise. Both housing debt and non-housing debt, such as student loans, credit cards, and auto loans, have been surging to new highs. A number of factors contribute to this rise in loans, including labor market conditions, the inflation rate, and interest rates. One factor that attracts much attention is the emergence of financial technologies that power both online and traditional lending.

Technologies facilitate lending by streamlining the process at every step:

Lending has been notoriously difficult and costly due to the highly manual processes on the lender’s end, which then translate into delays and frustrations on the borrower’s end. Financial technologies nowadays are improving and expediting the lending process in an unprecedented way, thanks to the latest loan origination systems (LOS) and automated decision rule technology. Financial technologies allow integration and automation of the lending process. As a result, both the application and the approval times are cut to days, or even minutes. Not only are we seeing the rapidly growing industry of online lenders, we are also witnessing the actions taken by traditional lenders to accommodate the needs of borrowers better.

Loan origination systems:

Loan origination was once a dreadful process involving numerous steps including application, pre-approval, and processing. Emergence of the latest LOS has, however, reshaped the process. Based in Grapevine, Texas, defi SOLUTIONS represents one of many new LOS platforms. Such all-in-one platforms allow lenders to manage applications and employ analytics at an affordable price. Their cloud-based nature also allows complete configuration by the lenders. This eliminates the need for installation of on-premises IT infrastructure, which can help lenders avoid additional overhead expenses.

Automated decision rule technology:

With cloud-based LOS providing 24/7 accessibility and scalability that accommodates all needs, automation brings a new level of precision and efficiency to the lending process. From verification to evaluation, the traditional lending process involves numerous manual tasks. These can now all be replaced by the new data-driven automation technology. One example is the lending technology provider FormFree. FormFree provides automated verification of a borrower’s assets and evaluation of their ability to repay, allowing the entire process to be highly accurate and efficient. All of this results in a hassle-free application process on the borrower’s end and improved profit on the lender’s end.

Big banks chasing small businesses:

Facing the fierce competition posed by online lenders such as LendingClub and SoFi, many big banks are turning their attention to small businesses, when it comes to lending. Small businesses are certainly a key contributor to the nation’s economic growth. In fact, small businesses create a majority of the jobs in the United States, notes an internal report by the U.S. Small Business Administration. Thus, it is not surprising that traditional lenders such as Wells Fargo and J.P. Morgan are launching more small business loan innovations than ever. And indeed, the approval rate for small business loans reached a record high of 25 percent in 2017, according to the Biz2Credit Small Business Lending Index. Furthermore, the market of small business loans is yet to be explored, as Morgan Stanley estimates a total addressable market of $284 billion. What powers these small business loan innovations? Again, financial technologies.

Wells Fargo represents one of the front-runners, having entered this market by launching their in-house FastFlex Small Business Loan back in 2016. The online platform FastFlex allows fast-decision loans that can be funded as soon as the next business day, thanks to the automated technology. On the other hand, J.P. Morgan decided to partner up with Silicon Valley darling OnDeck. This partnership allows J.P. Morgan to take advantage of OnDeck’s existing technology-enabled financial platform to dramatically speed up the lending process for its small business customers.

Avoiding system risk posed by new financial technologies:

With financial technologies powering various types of loans to record highs, we have to ask the question, will these financial technologies impose systemic risk? In contrast to banks and credit unions, online lending tends to bypass many regulations that the others have to abide by. A holistic set of regulations are yet to be created. In addition, with the browser-based online financial platforms, both the lenders and the borrowers are unavoidably susceptible to cybersecurity and privacy breaches. To end on a high note, however, all of the lending sources are heavily scrutinizing the lenders’ “five Cs” of credit — character, capacity, capital, collateral, and conditions — and continue to be very risk averse.

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