Findings from ABA Research
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—and what banks can do about it.
Fintech digital lending is gaining momentum.
Traditional banks—particularly smaller ones—have typically lagged in technology adoption for lending, especially compared to up-and-coming fintech players.
If you’re a glass-half-full person, this technology shortfall could be seen as an easy opportunity. Could digital automation for lending represent the next wellspring of growth for banks? And if so, what is the best way to get there?
Non-bank digital lending represents a sliver of total lending in the U.S.—only 3% of consumer loans and 5% of small business loans as of 2015.
However, non-bank lenders are creating significant new demand in areas not traditionally served by banks, focusing on non-standard credit profiles that expand their market for borrowers. While their initial solutions targeted lending for a limited range of loan types, new non-bank offerings have expanded to include student loans, mortgages, commercial real-estate loans, and small- to medium-sized enterprise (SME) loans.
At the same time, the flood of non-bank lending companies has fragmented the lending market, resulting in specialized, agile solutions that traditional lending platforms have found difficult to match. Well-known examples include Lending Club and Prosper for consumer loans, OnDeck for SME loans, Promise Financial for weddings, StreetShares for veteran-owned businesses, and CommonBond and SoFi for student loans.
How are banks responding?
Many traditional banks offer some form of digital capability around lending, such as loan status, loan payments, and basic account information. However, the majority of banks’ lending processes—including online application, onboarding, processing, underwriting, and funding—have yet to be overhauled through technology.
That means there is still a lot of opportunity to improve productivity, close more loans and increase revenue per loan with cheaper, faster, and automated services. Customers expect it, and non-bank alternative lenders are offering it. But most banks are not there yet.
Bain and SAP Value Management Center estimate that only 7% of bank products are handled digitally from end to end.
Here’s why that matters:
- Digital channels improve the customer experience.
For customers, non-digital loan processes translate into slow turnaround time, low transparency, and low predictability. A 2016 Federal Reserve survey found that among bank customers:
- 45% of respondents complained of long waits for a credit decision.
- 42% felt the application process was difficult.
In contrast, online lenders far outperformed traditional banks on both counts, with:
- 17% complaining of long waits.
- 26% reporting that the process was difficult.
However, customers have had their issues with non-bank alternative lenders. Borrowers who have used these lenders often report significantly lower overall satisfaction (26%) than those who turn to traditional banks (75%).
Online lenders may offer a smoother application process and faster credit decision, but the rest of the experience often disappoints customers, with:
- 19% unhappy with their repayment terms
- 33% complaining about unfavorable interest rates
It’s significant then, that only 3% complained about unfavorable interest rates at banks.
When it comes to consumer and SME lending, banks by nature have some notable advantages. They have stable, low-cost funding and a long experience managing credit risks through business cycles.
Equipped with these competitive advantages, banks that innovate and leverage new digital lending technologies will be well-positioned to compete—as long as they can make it cost-effective to originate and service their loans.
- Digital channels reduce the cost of managing loans.
For now, non-bank alternative lenders have the upper hand on efficiency. Operating expense as a percentage of outstanding loans runs at approximately 6% at banks that use traditional processes. That compares to less than 2% at the non-bank alternative lenders.
Automation can also reduce the time banks spend to underwrite loans, so they can make more loans and offer more products. Borrowers can receive loan approval and funds more quickly.
Respondents to the ABA survey reported that they grapple with the following challenges in consumer lending:
- Efficiency (72%)
- Cost (61%)
- Process, operations and staffing (57%)
The responses were much the same for small business loans.
Through automation, digital lending can make it feasible for banks to reclaim the consumer- and small business markets they may have exited for cost and efficiency reasons. Having a broader range of loan offerings can be vital for preserving and enhancing the customer relationship. Banks naturally (and rightfully) fear that if a customer goes to another bank or an online lender for even part of the relationship, they could ultimately lose all of that customer’s business.
Can you offer what many other banks don’t?
Only half of larger banks (assets above $1 billion) surveyed and just 38% of smaller banks are already using a digital loan origination channel—most frequently to support mortgage and consumer loan originations.
Within the category of consumer loans, digital loan origination was most prevalent for:
- Unsecured personal loans (73%)
- Home improvement loans (56%)
- Automobile loans (69%)
This mirrors the degree to which the surveyed banks offer these types of loans.
Of the banks that offer digital loan channels:
- 96% have digitized the loan application.
- 47% have digitized document uploads.
- 41% have e-signatures.
- 34% offer digital channels, such as email or instant messaging, for customer service.
For the most part, manual processes still drive the decision-making process. Only 13% of small banks and 32% of large banks offer instant credit decisions.
Clearly, there is an opportunity for electronic documentation and data validation in the loan process areas that many non-bank lenders are leveraging today.
In a nod to our smartphone-obsessed age, almost all of the banks—large and small—that offer some form of lending-related digital capability make them available on mobile devices. In most cases, that mobile capability is just being able to access the bank’s website from a smartphone, rather than initiating and completing the loan processes through the bank’s mobile app.
As Chris Rentner, founder and CEO of Akouba said, “Digital is no longer a nice-to-have, a maybe we’ll get there someday. Digitalization is a must-have requirement. There’s no reason that you should have something today.”
