Everyone is talking about it, some have already come a long way, many are in the middle of it while a few are still shying away from it: digital transformation has well and truly arrived in the financial world. 2020 once again highlighted how quickly digitalisation is becoming essential for survival in the financial sector. Using the end-to-end digitalisation of lending as an example, we have already shown how banks and financial service providers can help their customers, especially in times of crisis, with a fast, unbureaucratic and truly digital offering.
The entire financial world is going digital. Yet “digital” alone is not enough. Most of the current digital financial offerings lack automation. Although they often meet customer demand for digital financial offers, they don’t yet provide companies with the simple, fast process they had hoped for, with significant cost and time savings, optimal risk management and an above-average customer experience.
In this blog post, we’ll use the example of lending to explain how automating loan decisions works and why a digital process only brings the desired cost and time savings as well as the ability to scale when combined with automation.
Automated Loan Decisions Relieve Employees and Minimise Process Costs
A lot has changed in the lending process over the past decade, but one part of the process has always remained manual: the actual loan decision. Even if the application process is consistently digitalised, employees still make the credit decision manually in the background. This means that the amount of loans that can be granted is dependent on the number of available employees.
Automating loan decisions now puts an end to this by providing lenders with the most relevant key figures in the application process with just a single query, classifying them and thus enabling a reliable credit check. The loan decision is also enormously simplified, as only dedicated and standardised requesting of account information is required.
Digital + Automated = Customer Expectations Exceeded
Banking apps, online banking, financial tools...and then requesting proof of income via PDF and scoring based on historical data from a credit agency? For a long time, many bank customers could only wonder at the arduous, old-fashioned process of obtaining a loan.
The combination of digitalisation and automation of lending offers much more. Not only do you bid farewell to the separate submission and cumbersome copying and scanning of documents; the process is only complete and perfect when it’s both automated AND digital.
Credit checks run automatically in the background and provide applicants with what they really want: an immediate payout having gone through a convenient, simple process. A single login to their online banking account is all that is needed for this; everything else works automatically.
Minimal Risk Thanks to End-to-End Automation of Lending
Risk managers have long been critical of fully automated loan decisions – and for good reason. Long-standing policies and decision-making processes often depend on manual reviews and multiple controls. Analysing default causes and assessing “soft” factors are certainly worthwhile.
In traditional lending, banks primarily rely on financial data provided by customers. However, payslips and bank statements that are only available as PDFs are prone to manipulation and errors. Even when real-time account data is used, many banks and lenders don’t achieve the optimum with raw data, since they only rely on salary data.
On the other hand, the accuracy of an automated loan decision process that is based on real-time data has reached a point where it trumps traditional, manual loan decisions. Data-driven assessments, including querying negative features such as chargebacks or debt collection payments, and a structured framework with the right metrics can predict default risk better than subjective, human assessments – and are far more consistent.
Open Banking Partnerships for Automated Loan Decisions
Given the prevalence of Open Banking initiatives worldwide and the second Payment Services Directive (PSD2) in the EU, automated loan decisions can now be offered to a wide range of new and existing customers. Technology providers in the Open Banking sector have developed tools that aggregate transaction data and classify it into detailed income and expenditure items.
Intelligent data analytics leverages this wealth of risk data to provide simplified financial reports, relevant metrics, and real-time analysis. This transaction-based data opens up much more meaningful and timely insights into customer creditworthiness than outdated financial statements and historical data from traditional credit bureaus. Intelligent credit checks for scalable loan decisions also minimises sources of error through the automated pre-selection of metrics and ensures significantly higher data quality.