The State of Digital Lending

An ABA Research Study

Consumer and small business lending has traditionally been a time- and labor-intensive process, requiring paper applications, paper supporting documents, and highly manual processes with multiple hand-offs.

For customers, this makes for an arduous and unpleasant banking experience. For lenders, it adds up to an investment of resources that may offer an insufficient return, especially on loans of relatively small value.

Given the need—and the available technology—the rise of digital lending was inevitable.

But where do banks currently stand in this transition?

To learn more about how banks are moving away from paper-based lending processes, the American Bankers Association conducted a survey, drawing responses from nearly 200 banks. The resulting report, The State of Digital Lending, provides a new window into the current landscape in digital lending.

The survey delved into issues like:

Challenges and opportunities in digital lending
Use of digital lending technology
Views on partnering with non-bank digital lenders

The report found that only half of banks with assets over $1 billion and 38% of those under $1 billion currently use a digital origination channel. Of the banks that do offer digital loan origination:

96% provide digitized the loan applications
47% provide digitized document uploads
41% provide electronic loan agreement signature
34% use digital channels like email or instant messaging for customer service
19% offer instant credit decisions

Digital lending fundamentally changes the business case and customer experience.

When the loan application is online, borrowers can easily fill it out at home at their convenience. In a well-designed portal, the questions are intuitive, stepping the customer through the process in a straightforward manner. Borrowers can usually upload most supporting documents right in the application. There’s no need to photocopy or hand-deliver documents.

Customers expect this ease and convenience, and if they’re not getting it from their bank, they may go somewhere else.

“Banks are actively seeing themselves lose customers to non-bank financial institutions and tech giants like Amazon, and they have to find a way to stop that,” said Chris Rentner, founder and CEO of Akouba, a provider of digital solutions for small business loans. “Customers are leaving banks because they want a better user experience, more transparency, and quicker processing time.”

Rentner added, “Digital onboarding has been around for over a decade. If community banks want to remain an important part of the financial ecosystem, they need to quickly adopt this type of technology. Saying you’re going to put it on a five-year plan and get moving on it in a few years is already too late.”

Bankers also weighed in with their perspectives. “Digital lending absolutely can level the playing field,” said Julieann Thurlow, president and CEO of Reading Cooperative Bank. “Unfortunately not enough community banks recognize that we’re at that intersection where if we don’t adapt and adopt, the best credit is going outside our industry, and we could be headed for a rough and rocky road ahead.”

Here are the top 10 takeaways from the report:

Banks must embrace digital lending. Even in a community banking environment focused on customer relationships, there’s a demand for the expediency and convenience of digital interactions, especially among millennials.
Non-bank digital lending is growing fast. Showing year-over-year growth of 93% in 2015 and 58% in 2016, non-bank digital lending is expected to reach $122 billion by 2020. That’s a ten-fold increase in only six years.
Banks put themselves at risk by lagging in technology adoption. Customers expect digital loan origination channels and non-banks are offering it, yet only 7% of banks can handle loan products digitally from end-to-end.
Digital lending can open new business opportunity. Through cost reductions brought by automation, digital lending can make it feasible for banks to reclaim the consumer and small business lending they may have exited as being unprofitable.
Banks can implement digital lending in several ways. Banks can use Software-as-a-service (SaaS) solutions to white label their own digital lending processes, or make referrals to digital lending partners.
SaaS is a strong option. Building a digital lending platform in-house can deliver the most differentiated customer experience, but for most banks this approach is out of reach. Cloud-based, third-party digital lending solutions offer fast implementation, a pay-per-volume model, and greater adaptability.
Banks remain in control. Banks that white label a third-party lending solution maintain their own underwriting criteria and standards—and can hold the loans on their own books.
Bank-fintech partnerships can be very synergistic. Banks excel in customer relationships, compliance expertise, and risk mitigation. Fintechs excel at providing innovative, digital platforms and intuitive user experiences. Together, both stand to gain.
Trusted technologies are available today. Mature firms exist today that can help banks fully digitize the application and underwriting process to deliver faster loan decisions and a better overall customer experience.
ABA offers fintech resources. ABA has developed several resources for member banks to help them better understand the fintech industry, including the ABA Fintech Playbook and “Understanding Fintech,” a series of white papers. After extensive research in collaboration with Medici, a technology research firm, ABA has endorsed several digital lending solutions: Akouba for small business lending, LendKey for student lending, and Finastra for its mortgage loan origination system.