The next generation of commercial loan servicing systems in three dimensions

As interest rates rise and growth slows for commercial lenders, investment in the back office is back with a vengeance. That’s great news for loan servicing operations, which look set to benefit in more ways than one from a renewed focus on cost cutting and efficiency.   

In the boom times, when lending is one of the biggest drivers of top-line revenue for banks, it’s the origination and credit assessment platforms that get the bulk of the attention – not to mention the IT budget. 

But in a more precarious economic climate, where debts go bad, loans stop performing and margins start shrinking, all eyes turn to lowering the cost of processing each credit.

Another fallout from these kinds of market conditions is a move toward originate-to-distribute strategies. So, rather than just originating and managing loans, banks are also syndicating them in complex structures that are harder to service.

Harder, that is, if you’ve not invested in the latest commercial loan servicing technology.

In the face of these developments, the priority for commercial lenders is to not only automate more back-office processes, but also to rethink their whole approach to servicing loans.

For a truly next-generation commercial loan servicing strategy, forward-looking lenders are concentrating their investment on three key areas of the back office:

1.     User experience

As more banks migrate from fat-client lending solutions, they’re also looking to get more from the web-based technology they are moving to.

It goes without saying they need efficient tools and workflows for managing the transactions of today, so they can rapidly assess simple small business loans while guiding complex syndications through a more considered, wizard-driven decision-making process.

But they’re also thinking about the future – and particularly how to make loan servicing an integral part of an end-to-end ecosystem.

Gone are the days when servicing teams spent the bulk of their time manually booking loans and keying in data. Now they need credit assessment and transaction data to flow in seamlessly from origination systems and borrower portals, for automatic routing on the right lending journey.

In the long term, we’re also likely to see AI help users not only better manage exceptions but also navigate loan data, with generative AI chatbots pulling in all the necessary numbers on customers and facilities in seconds.

2.     Accounting

As recently as a decade ago, some banks were happy to analyze their commercial lending P&L statements on a monthly basis, or book loans the day after they were paid out and reconcile them two or three days later.

Today, accounting needs to happen much, much faster in the loan servicing process. As recent regional banking crises have shown, a lot can change in the world in less than a day – so, the mission of the next-generation accounting engine is to run in real time and process detailed data on transactions, cash flows, hedges, losses and credit risk shocks or other market events as they happen.

Much of this is possible already and helps banks get constantly up-to-date views of liquidity across their organization.

And with the current increase in – and electronification of – loan trading, trade and settlement accounting is also moving toward more fully automated, real-time processes.

3.     Analytics

Data clearly plays a vital role in the commercial lending life cycle – and by analyzing their data throughout the cycle, commercial lenders can considerably increase insight on credit risk and loan performance.

But traditionally, data has been siloed in separate systems, making it difficult to get a complete picture of customers and the portfolio as a whole.

The trick is to fold shared analytics capabilities into every stage of a single end-to-end lending process, from credit origination and assessment to loan servicing.

Again, generative AI will almost certainly play a major role in the analytics process by mining real-time data to deliver faster, deeper insights for loan servicers.

The future of loan servicing starts here

Some of the innovations I’ve described are still in the early stages of their development, as commercial lenders and their system providers explore how to get the best from emerging technologies like generative AI.

But technology never stops advancing – and with the triple threat of a seamlessly automated user experience, real-time accounting and integrated analytics, next-generation loan servicing technology is sure to have a transformational impact on the management of commercial loans in the future.

Then, when the good times roll again, both the front and the back office will be in a stronger position to drive growth.