It wasn’t that long ago we had to go to an actual library to do research, a video store to rent a movie, or had to navigate the world using a paper map.
How many industries has technology fundamentally changed in the past few decades? To rattle off a few: travel, print, media, television, retail, hospitality, manufacturing, education… the list goes on and on. Thanks to the introduction of financial technology, here is another industry to add to the list: small business lending.
The lending industry has been growing over the last couple of years at an incredible pace. Technology has changed commercial lending in ways no one could have predicted 20 years ago and at a pace never before seen. It is now becoming obvious that the accelerating pace of technological change is the most powerful force in the financial services ecosystem today. In order for banks to keep up, and survive, they must become innovative, flexible and adaptable.
By using new technology, lenders have the potential to completely revamp the business lending market – bringing speed and efficiency to an industry that, up until very recently, has been known for the exact opposite.
Here is a rundown of how technology has changed the business lending industry, and what these changes mean for the future.
The History of Commercial Lending
To get a good grasp on the history of commercial lending, consider a statement made by Bill Gates. In 1994, he was quoted in a Newsweek interview saying, “Banks are dinosaurs.” Until very recently, this statement rang true in regards to the commercial lending process.
Traditional banks have helped fuel business and economic growth for years by providing small business owners with startup loans, general business loans, lines of credit and refinancing programs, to name a few. However, one of the biggest hurdles for small business owners is the loan approval process – traditionally, it has been time-consuming and very involved.
Banks have previously had to rely on credit scores and tax returns as a main approval factor, leaving employees to compile all of that data manually. Assessing the creditworthiness of any business can be a challenging task, so the tools a financial institution uses to complete this task can impact underwriting standards, timely approval, cost and the scale of any unpredicted losses. Many banks are still struggling to achieve those objectives, because they are still making lending decisions based on old data using manual, paper-based loan approval procedures.
As a result, they have slower decision times than what many customers want, and an internal data management problem that creates more work for bankers. Manual and paper-based underwriting practices lack consistency, auditability and accuracy, and above all, are time consuming. This process is outdated in today’s complex society and it does not reveal the true probability of whether a borrower can pay back a loan or not. Luckily for those lenders that are ready to embrace change, there are new technologies emerging on the scene.
The New Frontier
In the current commercial lending market, financial institutions are increasingly mindful of the need to improve their practices in many areas to increase efficiency, decision speed and productivity, and to enhance the customer experience. To meet the challenges of a rapidly changing market, banks will need to adopt tools and technologies for enhanced data collection and process automation. New data sharing and standardization technologies are available which can innovate the lending industry entirely – like Amazon did to books and retail. These recent innovations help solve issues throughout the entire funding process.
In the underwriting process, technology is crucial, and in a fast-paced society where time means everything, a quicker, more efficient lending process is paramount. Financial institutions now have access to technology that enables them to pull hundreds of data points and various other cash flow statistics within seconds. Collecting financial data can be labor-intensive and difficult to complete, but it doesn’t have to be anymore. By utilizing advanced data collection software, financial institutions can get all of the data in an instant to help make timely decisions.
Emerging data sharing and standardization technology allows the loan origination and credit underwriting process to become simpler, speedier and clearer.
Financial Data is Imminent
The transactions and financial choices a small business makes can reveal a lot about their reliability for lenders, and there is no better way to determine reliability, or default probability, than by analyzing financial data. Financial data has always been present, but it is only with recent technological advancements that granular financials can be made fullyavailable.
Gone are the days of manila folders and stacks of papers. New technologies allow a small business borrower’s complete transactional history to be extracted directly from their accounting application, and standardized, before being delivered to the lender. This enables the lender to focus on analysis and more accurately determine credit worthiness. Financial data provides a level of insight that simply looking at a company on paper – turnover, size, etc. – could never tell you. This data can also reveal a lot about the way a company’s finance department operates, providing you with invaluable insight into the day-to-day management of the business you are deciding whether to financially support or not.
As we look to the future of commercial lending, financial data is key. The Amazons of the world are known for using data points to help make informed business decisions, so why should banks be any different?
Technology has increased the efficiency of numerous industries worldwide, including commercial lending. The industry continues to grow exponentially, and advancements in technology are completely overhauling previous, outdated loan approval methods. Technological advancements and continuous innovation are putting the lender in the seat of the borrower’s financial controller, and empowering them with insights that result in smarter, faster and more efficient loan approvals.
Transformation is no longer an option. We are now in a real-time, 24/7, anytime, anywhere world, where borrowers desire faster, more informed decisions. Winning banks will need to evolve beyond legacy, manual systems to a digital, enterprise-wide approach in order to succeed. Technologically advanced lenders will become theplace to acquire a loan in the future. Are you ready for the next frontier in loan origination?
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