How a Digital Commercial Loan Gets Made

By Debra Cope

The potential for digital lending is captivating the attention of bankers across the U.S., and with good reason. Non-bank competitors are making big inroads by delivering loans directly to customers precisely, quickly and smoothly via mobile technology and other digital platforms, and bankers recognize the need to respond. Nonbank digital loan volume is expected to reach $122 billion by 2020—a dramatic ten-fold increase over six years when traditional bank lending has been largely stagnant, according to a 2018 ABA study on the state of digital lending.

But exactly what does the transformation to a digital loan platform look like, and how does it benefit banks and their customers? Eastern Bank, an $11 billion mutual community bank headquartered in Boston, is one place to look for answers. While most banks have yet to overhaul online applications, onboarding, processing, underwriting and funding, Eastern Bank has more than three years of experience under its belt. In 2015, it unveiled the Eastern Express Business Loan, a digital offering designed to provide small businesses with fast funding of up to $100,000.

Indeed, trailblazing is a tradition at Eastern Bank, which was founded in 1818 and is the oldest and largest mutual bank in the U.S. It is committed to the growth and prosperity of the communities it serves, and is also a leader in small business lending, ranking in 2018 as the No. 1 Small Business Administration lender in New England for the ninth year in a row and in Massachusetts for the tenth year.

When the digital revolution started to take hold in banking, Eastern Bank was determined not to be left behind. To get immersed, its now-chairman and CEO, Bob Rivers, and its chief information officer, Donald Westermann, spent several years getting to know fintech disruptors around the Kendall Square area in Cambridge, Mass. These efforts led to the launch of Eastern Labs, its innovation hub focused on partnering with fintech companies. At a time when rapidly evolving technology was up-ending traditional models of financial intermediation, Eastern Labs was conceptualized as a way to disrupt the bank from within.

In 2015, Eastern became one of the first banks of any size to offer a proprietary digital small business loan product. The Eastern Express Business Loan has generated more than $100 million in volume since its inception, underscoring how a conservatively run bank can capture business opportunities driven by technological innovation that might otherwise go to financial technology specialists or bigger institutions.

“As a mutual bank, we are deeply committed to serving the communities where we operate and to helping them prosper,” says Kris Puskar, SVP and business banking sales and innovation director at Eastern Bank.

Even as it enjoyed its market leadership position, Eastern Bank was attuned to changes in the lending landscape. The financial technology revolution had emboldened competitors. Upstart fintech firms had nimbleness and venture capital on their side; the biggest banks and non-bank financial companies had deep pockets from which to fund research and development. “We made a strategic decision to get out in front of the digital banking trend and be an early adopter,” Puskar says.

The Express Business Loan was the Eastern incubator’s first hatchling, which the bank rolled out to customers at the end of 2015. These small-dollar loans typically can be processed and closed in a single day, Puskar says—a sharp contrast to traditional loans, which take 48 to 72 hours to process and up to 10 days to close.

Dan O’Malley had founded PerkStreet Financial, through which he met Rivers through a mutual connection, which led to PerkStreet’s executive team joining Eastern Bank and forming Eastern Labs. In May 2017, Numerated, the company O’Malley now runs, launched as a spinoff from Eastern and provides a platform for banks that enables loans to be made in real-time by digitizing the entire application process. This saves customers and banks time and reduces loan transaction costs.

Eastern Bank continues to use Numerated’s digital banking platform, which is now also in place in 11 banks ranging in assets from $2 billion to more than $50 billion. In 2018, Eastern hired Ashley Nagle Eknaian as its chief digital strategist. Under her leadership, Eastern Labs is tapping into Eastern employees and the fintech ecosystem for ideas to ensure an always-improving customer experience.

A branch-based solution

Eastern Bank’s digital business loans start their life in the bank branch, whether physical or virtual, and it is generally front-line employees rather than loan officers who interact with borrowers, Puskar says. This is a key difference between digital and traditional lending, he adds. Previously, branch employees, upon learning a small business customer needed credit, would refer the customer to a loan officer—a business banking relationship manager, in Eastern Bank’s parlance—because manual underwriting is more complex, Puskar says.

“Now, with the simple nature of this product, branch employees can service the product more frequently,” Puskar explains. “And because there are not as many hand-offs from department to department, this frees up our business banking relationship managers to focus on other transactions, working with clients, and delivering an excellent customer experience.” Automation enables Eastern Bank to deliver loans more efficiently while maintaining its traditional underwriting, pricing and compliance practices.

Step 1: Complete a one-page digital application

Borrowers who are interested in an Express Business Loan are asked to complete a simple, one-page application on an iPad. This is in stark contrast to the typical multi-page loan application to which business borrowers are accustomed. If the loan meets certain minimum qualifications at this stage, it moves forward.

The application process is streamlined because of groundwork laid during the implementation phase. “We go into the core system to integrate customer information with several other data sources that contain key information about businesses and industries,” O’Malley says. “Our software has already done many of the steps that a human would do—such as learning about the business and the industry it operates within.” This pre-eligibility screening model is a powerful component of the platform.

The digital loan platform also integrates the bank’s credit policies into the application software, says O’Malley. “If I’m a banker and I’m talking to a business owner, this helps me assess who can get credit before we even get an application started. That respects the business owner’s time and makes me more effective as a banking relationship manager,” he says.

Step 2: Validate the borrower

Stage two: Using publicly available information to make loan decisions, the due diligence process covers all the steps that would occur in a traditional loan, but the process is accelerated because the platform uses modeling to pull in relevant data to drive the loan decision.

Step 3: Loan decision

Advanced analytical models are used to automate the credit decision, enabling Eastern to underwrite the loan quickly. If a loan is approved, the interest rate, fees and loan terms are presented via the platform to the customer, who can access the information on the go. If the customer accepts the loan, he or she signs and returns the loan documents electronically.

Step 4: Loan funding

In most cases and with the necessary approvals, the loan for Eastern customers is funded within the hour and distributions are processed into the customer’s business checking account. Documents for Eastern customers are signed electronically, eliminating the need for a physical closing.

Sizing up the results

The faster process matters to consumers. In a 2016 Federal Reserve survey, 45 percent of respondents complained of long waits for a credit decision, and 42 percent felt the application process was difficult. In contrast, online lenders far outperformed traditional banks on both counts, with only 17 percent complaining about long waits and 26 percent a difficult process.

Digital lending has enabled Eastern Bank to convert a number of customers who previously only had deposit relationships into borrowers. “It has also opened the door to other conversations on how we can continuously work to provide customers with quality products and top-notch service as their businesses grow and evolve,” Puskar says. “By opening up a broader conversation, we can deepen the relationship.”

“Businesses know when they have a need for capital coming up, and we know that every business has a bank account and many borrow beyond their primary bank,” O’Malley explains. “They know they will need to replace equipment or expand operations. And they’ve been getting mail every week for the past four years from companies like American Express, Kabbage, OnDeck Capital and PayPal that want to lend them money.”

In 2015, when Eastern started down this road, “there weren’t a lot of banks with an external vendor that had a true fintech loan product. Now each year you see more and more banks adopting something, whether they are creating it in-house or partnering with a vendor,” Puskar says.

Most importantly, the addition of a digital lending platform for small-dollar loans meshes with Eastern Bank’s philosophy of continually enhancing the customer experience and is strategically aligned to its mission of serving communities in its footprint, and serving communities at Eastern includes a focus on small businesses.

As the bank’s chief digital strategist, Nagle Eknaian sees digital business lending as an essential offering for forward-looking banks. “Technology is such a big part of our personal lives and how we interact with the world day to day. We want to make sure your banking experience really mirrors that and offers the same ease.”