The business lending gap
Over the years, we’ve seen banks move away from smaller loans because it can take just as much time to process a $50,000 loan as a $5 million loan — with far less money to be made. This has created a lending gap for businesses. We’re seeing small businesses struggle to access capital, while large corporations aren’t seeing the same problems with access to capital as they are more lucrative for these financial institutions.
Increasing margins with automated underwriting and income verification
While the current state of lending might make sense from a business perspective, there are ways to make smaller loans significantly more profitable, with ultimately bigger benefits to gain. When lenders automate their underwriting and become comfortable with their models, they can essentially flip the switch to automate their once-manual underwriting process. This will allow underwriters to focus on larger deals, while the smaller loans are running through the automated cycle.
However, to automate loans successfully, lenders need tools like Bud to understand more about their customers. They can use Bud to determine whether potential borrowers are receiving income on a regular basis, what their cash flows look like, whether they have any additional side income (such as from the gig economy), or whether they have any off-bureau debt. This information is then automated to flow automatically into their model — which might also include other data, such as the customer’s credit history and score. All of this happens in a matter of seconds, making it possible for lenders to become more competitive, including offering same-day or next-day funding to their customers. Financial institutions can finally move away from the outdated, traditional stacks of loan-processing paperwork and save time in the process. Automation also eliminates the risk of human error, while offering opportunities to increase employee productivity for other revenue-generating activities.
Earning loyalty and wallet share via customer experience and speed
Processing loans faster has benefits for everyone involved. Lenders can reduce costs, increase revenue and start collecting interest sooner, while customers can access the money they need, and faster than ever.
Amazon set a new standard for a world where everything is expected to be right at our fingertips. Depending on where you live in relation to a fulfillment center and the time you place your order, you might even receive your shipment on the same day. Their company almost single-handedly shifted customer expectations around the globe, and in customers’ eyes, banking should not be an exception. Today’s landscape is all about speed to market and customer experience. Word of mouth is more important than ever, thanks to social media, where influencers can spread positive and negative reviews in a matter of seconds. The faster financial institutions can fund loans (think: 24 hours vs. 3-6 weeks), the more word will spread, and the easier it will be to set themselves apart from the competition. Of course, the rewards to be gained can go far beyond those initial loans. Customers might decide to move their checking accounts, savings accounts, mortgages and any other loans they might have to these faster financial institutions.
Bud can still help when your customer doesn’t meet automation criteria
Bud can also help with applications that don’t meet the criteria for automated underwriting decisions. Financial institutions usually require a certain credit score, collateral, and the knowledge that the customer has been at their address and their job for a certain amount of time. When they don’t fit that criteria, we can leverage transactional data with Bud. These applications are referred to an advisor for review, where they’re still more likely to have a good outcome. Instead of waiting for your borrower to go into their branch, to their employer or online to collect supporting documents (pay stubs, bank statements, etc.), we can use transactional data to get all the information you need in a matter of seconds.
Before declining the loan, you can ask the customer to connect any external accounts that might help paint a more accurate financial picture. We can quickly pull the insights you need, such as on-time bill payments, to give you more context to support your final underwriting decision. Historically, financial institutions are very focused on credit scores, so this does require a new mindset. But for those who’d like to lend to more customers with greater speed, these insights make all the difference.
In time, I believe we’ll see the entire industry shift towards a combination of transactional intelligence and legacy credit bureau data. They will be blended together in a way that satisfies regulators and credit risk analysts, while getting more loans into more customers' hands — in less time, and improving profitability for lenders.
