Banks and NBFIs are among the top industries that have been’and continue to be’profoundly affected by digital transformation.When so much data is available, it’s natural that the way they approach credit has changed. But who benefits the most from this shift? In this article, we will examine the entire process from various perspectives.
The competition in the commercial lending industry is huge and leaves all players no choice but to adopt technology to stay relevant. The rise of fintechs and smaller competitors’who are often faster, more flexible, and more user-friendly’further pressures traditional them to innovate.
The introduction of these new players, technologies, and favorable regulatory frameworks is driving industry-wide changes in the commercial lending industry and these changes are evident in the growth trends of the global business loan software market. According to a recent report by the Allied Market Research Group, the global loan management software market continues to grow at a CAGR of 17.8% (2022 – 2031) and is projected to reach $29.9 billion by 2031.
Digital Transformation in commercial lending has indeed become a new frontier for competition among industry players. While the returns on these investments may take a few more years to fully unfold, the shifting dynamics in the market demand that all participants reevaluate their strategies for serving customers effectively.
Is There a Way to Escape Digital Transformation?
Traditional financial institutions are often perceived as reluctant to change. However, life sometimes makes adaptation not just an option, but an urgency. The COVID-19 ended a couple of years ago, but its influence on the acceleration of technology adoption will be felt by all parties involved for many years to come.
How exactly? During this period, even the most traditional financial institutions increased their digitization efforts, while fintech companies seized the opportunity to demonstrate their superior customer service capabilities compared to traditional banks. As tech innovators directed their focus to this space, the emphasis in the industry shifted towards developing new technology-backed strategies to address challenges posed by the lockdowns and existing industry barriers. These strategies ranged from enhancing the quality of the user experience to establishing a time-to-market framework for banks to innovate products, processes, and channels of contact. The drive was aimed at improving service delivery, cost efficiency, and exploring partnerships to streamline regulatory compliance burdens. Across various business domains, banks are restructuring their value chain structures and adapting their business models accordingly.
Increasingly, technology has become a strategic choice that will determine the future trajectory of banking and banking business, and the extent to which intermediary financial institutions can redefine their role in the market.
Factors Driving Digital Transformation of Commercial Lending
Digital transformation has become a vital strategy for financial institutions and several key factors are driving this transformation.
Customer Expectations: Customers now demand seamless digital experiences across all aspects of their financial interactions. They expect quick loan approvals, easy access to information, and efficient communication channels. Commercial clients are increasingly willing to change banks for innovative experiences, with many seeking the same level of service ease as retail customers. To keep pace, banks are adopting digital technology to offer faster loan origination, decision-making, and closing processes while providing amazing customer experience.
Technological Advancements: In the past, many banks operated complex and outdated legacy IT systems, limiting their ability to leverage digital technologies for scaling growth and improving commercial loan origination processes. However, with innovations in digital technology revolutionizing the lending process, commercial lenders now have the tools for faster credit assessments, automated decision-making, and enhanced risk management.
Cost Efficiency: Traditional banks relying on manual, paper-intensive underwriting processes often prolong the loan approval process and incur unnecessary costs. According to McKinsey, 30 to 40 percent of the manual loan origination process is spent on non-core, automatable tasks. However, with digital transformation, commercial loan providers can streamline operations, reduce manual processes, and lower their overhead costs. This cost efficiency empowers these financial institutions to offer competitive commercial loan terms and expand their lending portfolios.
Regulatory Environment: Regulatory changes, like open banking initiatives and data privacy rules, have really pushed commercial lending towards digital solutions. This shift has made compliance processes smoother and has cut down on the complexity that usually comes with regulations.
Market Competition: Traditional banks and financial institutions facing heightened competition are embracing digital transformation to remain competitive. Outdated credit risk models pose challenges in assessing client creditworthiness swiftly, and this has hindered the banks’ ability to keep pace with competitive forces in the market. The result is evidenced in the rapid growth of fintech loan portfolios. Nonetheless, banks are stepping up and adopting digital transformation in their lending processes to assert their presence in the market.
Data Availability: Access to comprehensive data and the tools to analyze them allows for more informed lending decisions. The proliferation of data sources, AI tools, and digital footprints provides lenders with extensive information for credit risk assessment and customer profiling. Data eliminated the guesswork and became the lifeblood of strategy development.
The Benefits of Digital Transformation in Commercial Lending
Streamlined Operations: Automated loan origination processes, fewer routine tasks, reduced processing times, and minimal errors’what more could lenders ask for? This streamlining of operations improves workflow efficiency and enhances productivity across the lending lifecycle.
Enhanced Customer Experience: Digital transformation enables faster loan origination and approval processes through automated workflows and electronic document management. Accelerated turnaround times reduce friction in the lending process and enhance borrower satisfaction. For customers, convenient access to loan applications, status updates, and customer support are among the benefits of technology implementation in commercial lending. Improved user interfaces and self-service options enhance the overall customer experience, leading to higher satisfaction rates and retention.
Data-Driven Decision Making and Risk Management: The main benefit of using digital tools is the objectiveness in its conclusions there’s zero human bias. When you feed the system with data reflecting borrower behavior, you get an accurate assessment of default probability. This information enables lenders to tailor their offerings and make informed decisions on whether or not to approve a loan for a borrower.
Cost Reduction: When lenders rely on traditional tools, they inevitably face the burden of manual work. Tasks that software can accomplish in mere minutes might take human agents hours, with the added risk of errors (since it’s natural for humans to make mistakes). With the right tools, lenders can save thousands of hours and dollars on routine tasks, and free up human time and attention for more important tasks.
Compliance and Security: digital transformation facilitates compliance with regulatory requirements by standardizing processes and ensuring data accuracy and privacy. Robust tracking and reporting functionality enable commercial lenders to generate reports on all aspects of the commercial loan for reporting purposes and audits.
Digital Transformation for Commercial Lenders
Commercial lenders crave efficiency, security, effective risk management, and a data-driven approach. This is exactly why it’s in their interest to adopt advanced technologies, such as AI and machine learning, to be able to make informed lending decisions, improve workflow efficiency, and stay ahead of competition.
The post How Digital Transformation Transforms Commercial Lending appeared first on Datafloq.
