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.