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The Data-Enabled Lender

Data is the key to effective decision making – of any kind. By acquiring and analyzing data, you can better inform and guide the decision.

Why? Because limited or misleading information rarely ever results in good outcomes.

Yet, for decades, lenders have based small-business lending decisions on outdated data points such as FICO scores or tax returns. Even worse, that information is skewed and often inconsistent with the health and viability of the business. Without the proper data, small business (SMB) loan decisioning is placed at a serious disadvantage.

The loan application process can be long and arduous, especially when lending to small businesses. It is important to provide a great customer experience, but it is crucial to base lending decisions
on accurate, reliable information. Today it’s all about the need for speed, but that doesn’t mean you should sacrifice quality data.

To remain competitive, banks must review existing processes and implement technologies to drive efficiency, reduce risk and provide a better customer experience.

A Fragmented View of Data Can Have Serious Repercussions

In the high-flying days between 2005 and 2007, banks around the country relied heavily on FICO scores and tax returns to make quick decisions on millions of uncollateralized small business loans, with disastrous results. Banks were making decisions based on unreliable, outdated information, and as a result, we lost almost 3,000 banks during the great recession of 2008. The question that must be asked - why did investors allow financial institutions to assume so much risk? The answer is that gathering and inputting financials was so time-consuming, banks consciously made decisions based on partial and/or outdated information.

If the lenders had utilized robust financial data, they would have seen where the real risk in each loan sat. Because decisions were made using incomplete information, banks took on huge risks – and failed. Since the crisis, banks have started to reconsider their overreliance on tax returns and FICO scores. These old-fashioned methods provide an out-of-date picture, resulting in inefficient processes, increased risk and the threat of losing clients to alternative lenders.

We would have seen a different outcome altogether if better, more robust financial data had been available in 2008. It’s time to change. Lenders need a different and more accurate view when evaluating the health and risk of a small business – one that includes many data points instead of a single credit score or outdated information contained in a tax return. Lenders need data that can be accessed quickly and easily, without excessive paperwork, red tape or cost. This change is on the horizon, and it is being fueled by financial data sharing technology.

The Transformation of SMB Lending

Small businesses present a big opportunity for financial institutions. Traditionally, banks have been slow to deliver innovations to this client base. To be competitive, they must look for ways to transform their processes and improve the small business borrower experience.

The financial institutions that have adopted new technologies must ask themselves, “How are we getting the data and how can we get the data into our systems more efficiently?” Banks that do not invest in a tool to automate the gathering and standardization of a borrower’s financial data are approving or denying a SMB’s loan application based on partial, out of date information.

Therefore, investments made in other technologies to improve loan processing will be of limited benefit.

Banks must determine a way to meet borrower expectations and offer fast, reliable service – or risk losing customers to alternative lenders. Financial data sharing application programming interfaces (APIs) are helping FIs do just that.

For banks to differentiate themselves competitively and drive positive change throughout the entire lending process, complete financial data must be examined. Alternative lenders are already connecting directly to their SMB clients’ accounting package via APIs. SMB lending is evolving as a result of technology. Early adopters are already moving away from legacy systems and towards API technology.

From Inefficient to Effective

Historically, the business lending workflow has been bogged down with manual paperwork processes that can take the borrower days or weeks to prepare and submit. Lenders request a laundry list of financial reports including: balance sheets and financial statements, bank statements, tax returns, accounts payable and receivable and details about the vendors on those lists, as well as details about outstanding loans and tax returns.

After investing a significant amount of time in gathering the requested information, the SMB submits it to the lender, typically using insecure methods.  From there, the lender has to make sure all of the documents were received and may have to go back to the borrower for any items not received. Once the requested information has been provided, the tedious process of manually spreading the data into the financial institution’s legacy systems begins.

As we know, manual data entry is subject to error and can lead to further inefficiency and negatively impact lending decisioning. Finally, the data is sent to the underwriting team for review and approval. To determine credit worthiness, underwriters use a combination of tools and documents to approve or deny a loan. The problem is that when the decision to approve or deny a loan is made with limited, out of date data, even the best decisioning process will often be wrong.

The traditional lending process can take anywhere from 35 to more than 120 days to complete. This puts financial institutions at a disadvantage in a market where an alternative lender is turning around the decision in hours and days.  The borrower’s data becomes more outdated the longer it takes to reach a decision.

Securing bank financing is neither fast nor easy, but business owners need it to be both.  Financial institutions that lend to SMBs benefit from making the process more efficient and are enabled to better serve their customers.

The Data-Enabled Lender

Tools are now available that provide automated data extraction from a SMB borrower’s accounting system. Lenders receive the information in a standardized format in minutes and can easily integrate it directly into their existing portfolio management systems. This method provides transparency and in-depth insights.

With access to accurate, complete and current financial data, lenders are positioned in the seat of the borrower’s financial controller. They are empowered with data that provides a comprehensive view of the business’ financial health.

The daily decisions and transactions a small business makes can reveal a lot about their dependability, and there’s no better way to determine reliability or default probability than by analyzing complete and up-to-date data.

Having access to timely, quality data helps lenders proactively manage their portfolios. For example, a SMB that is struggling may just be focused on keeping its head above water, and therefore, may not be submitting financials in a timely manner. The ability to pull financial data from the SMB’s accounting application gives the FI insight into the business’ problem areas and provides the opportunity for the lender to be a true service provider.

It boils down to this: sourcing borrower data from their accounting package enables lenders to make fast, confident decisions. This improves the borrower experience and allows SMBs to focus on growing their business.

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Comments: (1)

Melvin Haskins
Melvin Haskins - Haston International Limited - 03 October, 2018, 08:18Be the first to give this comment the thumbs up 0 likes

Nothing beats the old-fashioned branch manager, who has the data to hand and can look the potential borrower in the eye and ask searching questions. The day that branch managers became dinasaurs was the day that banks became 100% dependent on data (usually incomplete and often inaccurate), but had no way of evaluating the plans of the business or the individual, Past history is only one of the factors in lending. Future plans are equally important. How do banks evaluate those future plans by evaluating data?

Crystal Berry

Crystal Berry

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This post is from a series of posts in the group:

Banking Strategy, Digital and Transformation

Latest thinking in respect to Banking Strategy, Digital and Transformation. Harnessing our collective wisdom to make banking better. Ambrish Parmar


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