As the UK’s booming alternative finance market becomes an ever more established[i] part of the country’s financial landscape, traditional banks must find ways to transform and speed up originations and underwriting processes if they are to compete for commercial lending opportunities from small-and-medium sized enterprises (SMEs).
According to recent data released by the Bank of England[ii], loans to SMEs fell in December 2017 at the steepest rate for three years. In fact, SME lending declined by £0.4bn, the largest decline since the same month in 2014.
However, despite this overall decline, it is interesting to see that lending levels outside of the UK’s main banks remained consistent. The chairman of the National Association of Commercial Finance Brokers, suggests is this a sign that businesses are continuing to seek finance outside of traditional means for growth and it leads us to consider why this may be the case.
Time is of the essence
In traditional banks, the origination processes,including underwriting and contracting, often take a long time. Due to legacy systems and complex regulations, assessing and analysing the huge amounts of unstructured information required for loan applications is a big task – and it is usually manually, requiring many hours from bank employees. Advances in digital technologies like artificial intelligence (AI), robotic process automation (RPA), and dynamic workflow can help banks transform these operations.
Banks can streamline and speed processes to free up employees to provide more value-added service and improve the overall customer experience. The business impact is clear: In a competitive market, delay and cumbersome manual processes can lead to great losses as clients simply give up and shop elsewhere.
Fintech companies that use multiple sources of data to create agile and efficient underwriting models are proving to be a very real competitive threat. For example, financial technology and data company Kabbage can deliver loans to SMEs in just seven minutes. With their data-first approach, fintechs are increasingly establishing a growing position in commercial sector lending and financing– already responsible for close to 10 percent of the industry’s revenues.
This strong foothold in the market will only continue to strengthen as a result of the new open banking regulation[iii], which came into effect in Europe at the start of year. Under the new ruling, banks must share data with third parties,as authorised by an account holder. Fintechs will, therefore, be able to combine their own data about customers with banking data and offer SMEs owners more tailored options.
What banks need to do
As commercial lending becomes increasingly competitive, traditional banks must transform, or risk falling behind as they lose valuable clients to more innovative and agile companies. These disruptive fintechs are not strangers to using emerging technologies, such as AI and machine learning-based algorithms, to determine an applicant’s eligibility. This makes the processes required for loan applications much more efficient, with zero human intervention required.
To compete, banks must redesign their processes and incorporate new technologies into end-to-end solutions. They need to streamline the entire lending process – from origination to maturity – and leverage new technologies to automate operations. From our experience working with global companies, AI and machine learning tools can complete 10 hours of ‘human’ work in just one hour.
Bank professionals also need to leverage the huge amounts of data they have at their fingertips to tailor customer experiences. Especially with open banking initiatives, it will be easier to access additional customer information to assist in underwriting. Banks could create models to offer differential interest rates depending on the sources of data available to underwrite. A successful example is the M-Shwari, a product from the Commercial Bank of Africa that taps into the telecommunication data of the poor and unbanked to make underwriting decisions.
In the quest to improve customer service, we also see an increasing number of traditional banks partnering with fintechs to deliver a more efficient experience via innovative platforms and breakthrough technologies that do not interfere with banks’ existing systems. This is something Santander did, teaming up Kabbage[iv] to accelerate growth in its SME business .
Be disruptive, not disrupted
Banks that successfully transform and automate their origination and underwriting processes will see the investment start to pay off as profits begin to rise.Automation not only ensures that banks can process applications much more efficiently, it also allows relationship managers to spend time on tasks that add more value. These include cultivating relationships and finding new business opportunities, instead of manual data entry for loan applications from SMEs.
The opportunity is there for the taking. Now is the time for banks to consider how they can redesign their processes, or else risk losing high value customers to competitors with much faster systems in place.