Feb 27 2018

ABA 2018: How Community Banks Can Use Tech to Get into Digital Lending

Digital lending can help streamline the loan generation and servicing process for banks and their customers, but technology is needed to make it happen.

Digital lenders such as CommonBond, LendingClub, OnDeck, Prosper and SoFi may seem like the barbarians at the gates for many banks, and community banks in particular.

Jason Henrichs, managing director at FinTech Forge, used that term to describe the fintech startups trying to disrupt the lending market. However, as he noted during a panel on Feb. 26 at the American Bankers Association National Conference for Community Bankers in Honolulu, nonbank digital lending represents a small piece of total lending in the United States. It captured only 3 percent of consumer loans and 5 percent of small business loans as of 2015, according to a January report from the ABA.

That doesn't mean community banks should sit idle when it comes to digital lending. Digital lending experts and entrepreneurs pointed out during the panel that community banks have numerous options to compete with nonbank digital lenders and to deepen their relationship with customers.

Digital lending refers to using online, digital platforms to originate loans directly to customers. Banks can either build their own technology tools to get into digital lending, use a white-label service from a digital lending firm or partner with such a company. Although it requires a clear investment in IT capabilities, either in house or outsourced, the experts said that digital lending can simplify the loan process, enhance the customer experience and help banks cut costs.

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Digital Lending Platforms Can Simplify Loan Management

Even though practically every bank has a mobile application that customers can use to access services, many banks are still just dipping their toe in the water on digital lending. The ABA report found that only half of banks with assets over $1 billion and 38 percent of those under $1 billion in assets currently use a digital origination channel.

Of the banks offering digital options for loan origination, the vast majority  96 percent  have digitized their loan application, ABA reports. However, just 47 percent have digitized document uploads, 41 percent have digitized e-signatures and 34 percent have made use of digital channels such as email or instant messaging for customer service. Only 19 percent said they offered instant credit decisions.

How can community banks crack into the digital lending market? Chris Rentner, CEO and founder of Akouba, which provides community and regional banks digital solutions for small business loans, said that banks should look for technology that allows them to deliver digital lending services across all devices and channels. The technology should use responsive design, work no matter where a customer originates or fills out a loan application (in a branch, over the phone or on their smartphone) and deliver a high-quality customer experience, he said.

Digital lending tools should also generate the right kind of application based on the information the customer provides; detect fraud via artificial intelligence, IP address reputation management and email confirmations; and be able to immediately filter out applicants who do not meet the loan standards of the bank.

Bankers should then be able to quickly understand the status of a loan application, easily sort and filter applications and start to build relationships with borrowers, Rentner said. A key goal should be to ensure that bank employees do not need to re-enter information and are able to seamlessly collaborate on an application, he added. Another key aspect of any digital lending platform should be the ability to view and analyze loan activity across the bank's entire loan portfolio.

Ultimately, digital lending can help banks streamline the loan process, Rentner said, allowing them to save time and money. Digital lending can cut down on the number of tasks bank employees must perform to process a loan, which delivers savings to the bank, he added. 

How Banks Can Get into Digital Lending

Traditional lenders such as community banks have lots of products, solid customer service and a deep presence in their communities, said MaryKay Theriault, group leader for product management of global lending solutions at fintech firm Finastra.

However, they often lack strong technology skill sets, she said. By contrast, digital lenders do not offer many products, have weaker customer service and do not have local presences in the community, but are tech dynamos.

Christian Widhalm is senior vice president of sales and marketing at LendKey, a lending platform and online marketplace that allows consumers to apply for loans from community banks and credit unions. LendKey offers a Lending as a Service solution that lets banks use its cloud-based technology to offer end-to-end digital lending tools. LaaS promotes and uses a bank's brand, balance sheet, underwriting and pricing to most effectively grow a bank's loan portfolio and attract customers, Widhalm said.

Banks have three options to get into digital lending, Widhalm said.

First, banks can buy a solution and pay for staff, which gives them complete control but is costly, time-intensive and requires the bank to maintain and operate the solution while meeting compliance requirements.

Alternatively, he said, banks can build their own digital lending platform in house, which gives them total control over a personalized platform. However, many of the same drawbacks apply and banks face an additional risk of the solution becoming quickly outdated by changing technology or borrow preferences.

The third option is to partner with a fintech company, which limits a bank's control and customization. However, Widhalm said, there are numerous benefits to such an approach, including lower costs, decreased time to market, limited operating expenses, support for regulatory compliance and a continuously improving product.

For all of BizTech's coverage of ABA's National Conference for Community Bankers, click here.

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