De-risking lending: how to move and scale while staying compliant
It’s a precarious time for lenders. Up against increasing demand for a painless customer journey, feeling the pressure to compete and grow, they’re also balancing risk appetite and constant regulatory shifts. Today, many banks and financial institutions recognise that automated digital lending solutions are essential to de-risk at scale, but there are sizeable obstacles to overcome before they get there.
The speed and frequency of change in financial services regulation has been overwhelming. Barely a day goes by without new rules on debt-to-income ratio or new controls to address the level of lending and risk in the market. We’ve even seen reviews of some processes we thought were bedded down, such as calculation of loan-to-value ratio (LVR).
Not all organisations have the people and infrastructure in place to easily support compliance. Maintaining a compliance program in a state of regulatory flux is a significant commitment, often sidelining other technology initiatives like core upgrades, infrastructure upgrades or front-end enhancements. Putting these digital banking solutions on the backburner may limit a bank’s ability to stay agile, relevant and to support their growth objectives. It’s an even harder pill to swallow given compliance is a preventative measure, with little to no return on investment.
At the same time, consumer expectations are higher than ever. Home loan customers are aware of the many choices open to them, including an array of digital offerings. To acquire and retain customers, banks are re-prioritising the digitisation of loan origination systems in the hope of delivering an exceptional customer experience. Chatbots, pre-emptive marketing, self-serve onboarding and online applications are all high on the agenda.
For lenders, these rising consumer expectations are happening in the context of a hyper-accelerated property market post COVID. While some smaller, more nimble financial institutions with good workflows have improved their time from submission to approval, for many, approval times have been unacceptably long. Consumer demand is often not being matched, and often that is down to lenders relying on manual processes and labour-intensive verification.
In the past, when loan approval response times threatened a bank’s business, they would clear the backlog by offering incentives to existing staff or hiring more employees. They would throw bodies at the problem, to at least give the appearance of greater efficiency.
But today, employees are already stretched to capacity. And there’s a real hiring challenge. COVID border closures mean organisations haven’t had the flex in resources that migrant or interstate workers bring.
An automated loan origination solution can give a faster time to yes, a lower cost-to-serve and a better return on investment. Lenders can shorten approval times by automating some or all parts of the process. That might include adopting Intelligent Document Processing (IDP) technology, which also improves a financial institution’s ability to meet regulatory compliance quickly and easily, while simplifying the loan origination process for customers and staff.
Talking to banks and other organisations, the longest part of the loan approval process is verifying data from documents provided by applicants. As a result, there’s now a lot of focus on automating that aspect; in future there’s no reason why we couldn’t eliminate the need for document verification completely if data comes from a trusted source.
With the constraints on hiring, a better cost-to-serve today means doing more with existing resources. Being able to automate assessment at least to a certain point is transformative for processing large volumes.
An application with low LVR, clean credit history, high income and low existing liabilities can be considered a good deal and pass through without needing a credit assessor to check. The automated system will then match the data and confirm its veracity. Ultimately though, this is dependent on each bank and how much auto verification they are willing to accept. If it is within an organisation’s risk appetite, it not only saves that assessment time and cost, but staff can be re-directed onto higher-value tasks, including focusing on deals that need more attention - deals that are more on the line.
Automation of loan origination processes also address the customer expectation for a seamless experience – especially for existing bank customers.
If a borrower has already provided their records and information, lenders shouldn’t be asking them to input that information again. They should already know where the customer works and how much they’re paid for instance, given they have the customer’s bank statements and more.
As a result, many financial institutions are exploring how this aspect of the process can be improved, how that information can be pre-populated, and how they can save customers the pain of re-supplying their information, as a matter of priority.
Whether an organisation relies on automated verification of various data points comes down to risk appetite and the maturity of their technology adoption.
Even where a bank adopts technology to automate the lending process and do the heavy lifting up front, they often still require a manual check of the validation. They want reassurance that the assets and liabilities declared up front are complete, that there aren’t other liabilities out there that they’ve missed.
Adjusting internal risk attitudes and managing compliance to allow for automation is always a tug of war. The business team wants a smoother business process, yet even if the change is greenlit by the risk team, there are clunky processes within it because risk won’t budge on having certain checks, or having multiple people look it over.
We are already seeing that, in some cases, home loans can reach unconditional approval without human intervention. Lenders can reduce manual intervention for applications that meet pre-determined criteria, but there will still be a large portion of applications that need manual assessment. If a credit policy is triggered, it needs to be reviewed by a credit assessor. Most banks will have that in place indefinitely.
There’s a lot more manual reporting going on in lending compliance than you would expect in a digital age. For some organisations, compliance with a particular transactional banking requirement might mean manually downloading all their statement transactions, identifying the transactions for a certain amount, putting them in a spreadsheet and sending it across to the Australian Prudential Regulation Authority (APRA).
Audit trails and tracking are made all the more difficult if your customer journey touches on multiple digital banking solutions. In this case there may be no central repository that maintains a log or a record of a transaction through its journey, which makes tracking quite painful.
If an organisation uses an end-to-end loan origination solution, the audit trail is already there, installed in the workflow, making everything available. Sandstone’s LendFast platform is one such solution. It draws on a big library of built-in compliance checks, and banks can respond to APRA changes by adding manual checkpoints.
Because APRA isn’t prescriptive on how to meet requirements, our platform also has to be flexible enough to support the multiple client requirements that come out of different interpretations of the regulations.
Risk appetite isn’t the only factor stopping lenders from investing in automated compliance. The cost to replace a system can be prohibitive. Also, if the bank’s technology solution has a gap, when they ask their vendor to customise and fill that gap, it can be expensive. If the vendor only offers out-of-the-box solutions, they may not have the technical expertise to tailor it at all.
By contrast, Sandstone has a strong network of technical staff that can support those changes as required. We offer scalable digital lending solutions that can stand up to the scrutiny of regulatory bodies, maintaining regulatory compliance before our customers even think to address it.
Whether it’s fixing a complex, end-to-end lending chain, or doing small improvements to critical sections, Sandstone Technology has a proven track record of de-risking and implementing transformation programs for over 25 years.
Article published Nov, 2021
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