Digitizing the Lending Experience
with a Loan Origination System

Over the last decade, Amazon has disrupted the retail industry, changing the way we shop and raising the bar on the customer experience. Likewise, online lenders have changed the lending game, improving the lending experience to meet heightened customer expectations for convenience and speed.

If financial institutions don’t modernize their traditional approach to lending with loan origination system technologies, they risk losing market share to the online lenders who have adapted. 

Many in the industry remember a few years ago when JPMorgan Chase’s CEO, Jamie Dimon, warned his bank’s shareholders, “Silicon Valley is coming.”

It appears he was right, as financial technology (fintech) companies originated $15 billion in personal loans in the first half of 2017, according to credit bureau, TransUnion. This accounts for nearly one-third of the total U.S. market for personal loans.

Frequently, consumers seek funding from online lenders due to the fast, seamless and oftentimes, paperless loan application process. The online application process typically takes less than 30 minutes, sometimes as fast as five.

Most online lenders have designed systems to fund approved loans within a few days and for basic credit requests, funds can be disbursed within 24 hours. Comparatively, consumers who apply for loans at traditional banks cite frustrations with the “difficult application process” and “long wait for a credit decision,” according to the Federal Reserve. 

For small business owners, the lending experience can be even more challenging, as the average small business owner spends 25 hours completing paperwork at up to three banks before obtaining funds.

Traditional approaches to small business lending also pose challenges for financial institutions in terms of profit margins. Oftentimes, financial institutions process a small business loan of $100,000 the same way they process a $1,000,000 commercial loan, which drives institutions to prioritize high-dollar commercial loans with greater profit margins.

However, by modernizing the lending process and leveraging technology, financial institutions can reduce the transaction costs for small business loans to boost profit margins and ultimately provide more funding to small businesses.

Despite these challenges, banks and credit unions boast a major advantage over online lenders. While most online lenders offer a more competitive application experience, traditional banks and credit unions have a leg up when it comes to rates.

Rates for a bank line of credit may be at or below a typical credit card rate, but an online or alternative lender’s rate can range from 7 percent to upwards of 25 percent, which means speed and convenience come at a premium.

Traditional financial institutions; however, can offer a similar level of speed and convenience at a lower rate, beating online lenders at their own game. Still, it is crucial that financial institutions take steps to optimize their lending operations with loan origination systems now because as online lenders develop steady and low-cost sources of capital, these lenders will eventually be able to price loans at rates competitive to those offered by traditional financial institutions.

This guide outlines how banks and credit unions of all sizes can digitize the lending experience, infusing it with speed and convenience to meet customer expectations, while positioning for sustained and profitable portfolio growth.

To offer the convenience today’s consumers demand, financial institutions must go beyond converting paper into digital documents and digitize back-end processes as well.

Minimize Data Entry

One way to accomplish this is by providing pre-fill functionality within the online loan application. This reduces the burden of manual data entry for the customer, prefilling the loan application with key data that is already on file at the institution. This is supported through integration with the financial institution’s core system. 

Financial institutions should also leverage technology with a responsive design to minimize keyboard usage. This is helpful for customers who submit an application on phones or tablets. Institutions should also replace input fields with drop-down menus to eliminate unnecessary keystrokes and reduce application abandonment. Additionally, eliminate any unnecessary input fields that add to the length of the loan application.

Offer Save & Resume Functionality

To further eliminate friction in the application process, banks and credit unions should allow prospective borrowers to upload supporting documentation without leaving the loan origination system's application.

For applicants who may not have all of their information available to complete the application, offering a save and resume functionality is essential. The financial institution can save the applicant’s contact details and then follow up with the applicant later, thus mitigating abandoned loan applications.

Lastly, it is critical that banks and credit unions have e-signature functionality for an outstanding end-to-end lending experience. If the borrower completes an application online, why should they have to step into the branch to sign loan documents?

Simplify Obtaining Loan Status Updates

Not only do borrowers want a better, more convenient lending process, they also demand a more transparent process. While online loan applications reduce the need for human interaction, this digitization of a previously manual, high-touchpoint process requires greater transparency. Consumers want to know the status of their loan application and when they can expect to receive a decision, but the bonus should not be on the consumer to hunt down that information. 

One way to achieve this is through a loan origination system's customer-facing portal that allows borrowers to obtain loan status updates at any time. This allows applicants to easily and securely attach missing or supporting documents right to the loan application at their convenience, even from a mobile device. The increased connectivity eliminates hours of follow-up while improving the customer experience and ensuring your customer feels like a partner in the process, not just another number. 

While efforts to deliver faster decisions for loan applicants will help increase transparency regarding the status of an application, there are still ways to boost transparency in the lending process and improve the overall borrower experience.

According to a recent Federal Reserve survey, transparency in the lending process is a problem for borrowers across the board, whether they’ve applied through an online lender, large national bank or a small community bank or credit union. 

Provide Consistency

An Oliver Wyman study also revealed that nearly one-third of borrowers indicate that understanding their loan’s fine print and terms is “frustrating” or “very frustrating.” Given the multiple drivers of the cost of a loan, including interest rate, origination fees, guaranty fees and prepayment penalties, it can be challenging for borrowers to fully comprehend the total cost of the loan.

Beyond finding ways to increase connectivity with borrowers during the lending process through tools like the aforementioned customer portal, financial institutions should ensure the terms of individual offers are clear. This will make it easier to differentiate their offerings from competitors.

Likewise, banks and credit unions can make it easier for borrowers to compare offers from multiple lenders with loan origination systems. Most borrowers consider at least two offers when seeking funds, but often find it difficult to compare the offers since lenders present the terms of the loan differently. For instance, perhaps a consumer applied for a loan through his or her local bank and through an alternative lender. 

By disclosing loan terms clearly and consistently, the bank empowers the consumer to better understand the terms of the loan offer. This also provides the bank an opportunity to highlight the lower rate they can offer compared to the rate offered by the alternative lender.

Aim for Clarity by Using Straight-Forward Terminology

An industry-wide standard for offer presentations would resolve this issue, but for now, individual financial institutions can take steps to avoid jargon and use consistent terminology in their own loan disclosures and provide standard definitions of fees.