Originating loans is a key part of most banks’ business. Loans come in many different varieties—from consumer to corporate, from secured to unsecured, from automobile to home loans. Despite these varieties, there are many commonalities in how all loans are processed. Each, for example, requires the bank to identify the customer and evaluate the risk of lending to that particular customer. To do this, the bank must collect the same type of customer information for each loan type, including the customer’s income, debt level, cash flow, etc.
With increasing competition, especially from new types of lenders, there is a great deal of pressure on banks to improve their loan origination processes. Regulation exacerbates this pressure by requiring banks to stress test their loans in case of interest rate increases or increases in defaults. Offerings from new challenger banks, such as the granting of instant loans for small amounts, also add to that pressure.
As a result, leading banks are looking for new ways to improve their loan origination processes. They want to speed up loan processing, improve the accuracy of loan pricing and risk underwriting, identify the right customer for the right loan, and deliver a better customer experience.
Digitalizing loan originations
Traditionally, banks relied on different, duplicate processes for each loan type. For example, the same bank would have different processes for mortgages versus unsecured loans, even though customer identification and risk-profiling requirements for each are the same. In addition, banks would use different back-end IT systems (e.g., underwriting systems) and front-end CRM systems to service and process different loan types.
This resulted in a huge amount of duplication and inefficiencies. To move ahead of the competition, leading banks are identifying commonalities in processing different loan types and implementing common digital technologies, processes, systems and risk controls. For example, they are using a common CRM system on the front end to identify customers and the type of loan they might want and a common underwriting system on the back end to assess customer risk. In addition, with open banking and with the customer’s consent, they can check the customer’s transaction histories to assess whether the customer can afford the loan, as well as potentially identify other loan products the customer has with other providers.
In addition, innovative banks are using data analytics to identify the most suitable loans for customers, the best customers for specific loan types, and the best pricing based on what customers can afford. This, in turn, replaces traditional manual processing and physical documentation. It also enables automated loan servicing.
The collections process also is changing. Traditionally, a bank evaluated affordability only with respect to granting a loan, and it did not reevaluate the customer’s propensity to pay at all, or, at best, only once a year. Today, with digital technology and open banking, lenders can evaluate affordability on a daily basis. This means a lender can spot potential repayment issues in advance, implement remedial measures to avoid the delicate and costly burden of collections, and better assess its liability risk.
An IT partner with the knowledge, technology and experience to speed up, automate and/or redesign loan origination processes is key to success. CGI is working with lenders across the globe to drive the digitalization of their processes. To learn more about our work or to discuss your organization’s loan origination opportunities and challenges, feel free to contact me.