Digital lending, or the process of applying for a loan online or on a mobile device, is the next major growth opportunity for all financial institutions. In fact, digital lending is anticipated to blossom into a $30 billion industry by 2025.
The largest financial institutions in the country are already taking notice of this growing income opportunity. The question becomes, then, how can community banks capitalize on the emergence of digital lending? The answer lies in understanding the nature of digital lending and its cost-effective, affordable and efficient nature.
The Need for Lending Speed
Traditional loans vary in size and complexity. However, they all share one grueling characteristic: it takes an exorbitant amount of time to complete the applications. This has proven to be a costly hindrance for both the applicant and the issuing lender.
In today’s digitally driven society, every moment of time is precious. In addition, for many consumers—especially small-business owners who need quick access to cash—a physical trip to the bank is often a luxury they cannot afford. Add the extensive in-person paperwork and underwriting resources to the mix, and the outdated nature of these “legacy loans” becomes truly apparent.
Loans Processed in an Instant
Digital lending condenses the application and underwriting process into an almost instant digital event, made possible through automation.
Through the power of automation, the process of applying for a loan is drastically simplified; all the applicant needs is a smartphone or other internet-enabled device. From it, he fills out the necessary information normally found on any physical loan paperwork, and e-signs the required documents. Almost instantly, he receives a notification stating the amount he is able to borrow.
The underwriting process also is automated, saving the lender countless hours. In years past, community banks could not afford to issue small loans due to the excessive time these loans spent in the underwriting phase, in spite of the fact that these loans were in plentiful supply. According to a Harvard Business School report, 60 percent of small businesses in the United States today need financing of $100,000 or less.
Further, according to FDIC data, community banks provide more than half of all small-business loans, but only about one-seventh of those loans are less than $100,000; and service to these smaller loans has diminished in recent years. In fact, community banks provided more loans under $100k to small businesses in 2006 than in 2016. Small loans have simply not been profitable to process, and thus have remained largely out of reach for community banks.
With the aid of digital lending, however, the underwriting process is completed through an algorithm, which reduces the time underwriters spend servicing smaller loans. Therefore, with the near instantaneous nature of automated underwriting, overall costs are reduced significantly, allowing community banks to again tap into this market and reap the benefits therein.
There Are Compliance Benefits, Too
From a compliance standpoint, digital lending solutions allow regulatory documentation to be stored in an easily accessible format. This is beneficial from an operational standpoint as well, because it alleviates the need for employees to complete manual searches of documentation, which can be a time-consuming affair. It also reduces the risk of human error pertaining to searching and storing compliance documentation.
Digital lending platforms also provide a transparent (and completely digital) audit trail—an enormous value when regulators require information promptly.
Technology such as digital lending is the foundation of the future for American banks. In one of its last white papers to the American public, the Obama Administration stated that fintech innovations like digital lending have the potential to “promote financial inclusion, expand access to capital for individuals and small businesses, and more broadly reshape how society interacts with financial services.”
For many community banks, digital lending might appear unattainable—a pie-in-the-sky fantasy. But that’s not the case, since it’s becoming more accessible and affordable for financial institutions of all sizes. And digital lending isn’t just another innovative enhancement; it serves as the bridge that connects community banks to small-business owners and other customers seeking smaller loans. So, with the demand for online lending on the rise, institutions that implement digital lending will take a bigger slice of the pie.
Brent McKown is a product manager with CSI, a role in which he is responsible for managing enhancements and providing new product direction based on market trends. He also oversees multiple strategic vendor relationships. Brent has prior experience in retail business banking and commercial lending.