Of the many areas where technology has affected the lending business, probably the most obvious is in how customers expect to interact with their lender. This is true at every step: from how prospective borrowers gather information and shop for credit products, through the application and closing process, to making payments and dealing with any issues that arise during the life of the loan.
In the software vernacular, the space where customers engage with a product or business is called the user interface, or “UI,” while the similar term “UX” (for “user experience”) is generally used to refer to the “customer journey” more broadly. For example, in the lending world, an online loan application would be a form of UI, while UX might also encompass how product information is made available to the applicant, how and how quickly the application is responded to, how an offer (or decline) is presented, whether and how the applicant might be steered to more suitable products, and how the closing process is handled.
As touched on in the introductory piece of this series, all of these things can contribute significantly to the health and profitability of a lending business, affecting conversion rates, customer satisfaction, and the efficiency of your application and origination process. These in turn drive borrower acquisition costs, customer retention and referral rates, borrower quality, and overall measures of business health like return on assets and equity.
In this piece we’ll look at what has changed in how market leaders in small business lending think about UI and UX before laying out a framework for approaching these questions in your own business and evaluating results.
What good UI means for a modern lender
First let’s look at the basic components of the user interface for a small business owner looking for capital to grow or sustain their business.
How the “user interface” has changed in small business lending
In each of these areas, purely online lenders (called “fintechs” in the banking world) have generally served as pioneers, though it is often the traditional institutions that bring innovations to the mass market. (Note: to keep things simple I’ll use the term “fintechs” here to refer to online-only lenders, though it can also refer to a huge range of finance-related technology companies.)
Fintechs have been able to move quickly to a large extent because they have nothing to lose and the world to gain, while the equation is reversed for banks, who are also held back by their heavy regulatory burden, need to deal with legacy systems, and a justifiably risk-averse culture. At the same time, banks do have a lot going for them. Every business has a bank account somewhere, and that bank is generally the first place they go for a loan. And of course banks have the cheapest capital available to mankind. But their sluggishness when it comes to modernizing their business-facing UI has cost them, at least on the margin.
Why UI and UX matter to non-fintech lenders
To start with a reminder of what is at stake, small businesses represent $36b in annual profits for banks, rising to $59b if consumer accounts linked to small businesses are included, according to a report from Oliver Wyman. The same report also notes that access to credit is key for small business owners when it comes to choosing a bank, with half saying they would likely switch banks if denied credit.
Although banks still dominate small business lending, the share controlled by the fintechs is already measured in the billions of dollars and is growing rapidly, with online lenders getting more sophisticated in how they compete for customers. Federal Reserve researchers estimate that online lending to small businesses reached $12b in 2017. Although this is less than 5% of bank credit to small businesses, the same report notes that the proportion of small businesses that applied for credit from online lenders rose significantly even just from 2016 to 2017, from 21% to 24%. S&P Global Market Intelligence seems smaller numbers but very rapid growth: they estimated that online small business loan originations were $6b in 2016 and will grow 21.5% annually through 2021.
A key driver of the competitive mechanism here is the preferences and expectations of small business owners, who are often the last to benefit from innovations that tend to play out first in the consumer and enterprise markets. As a 2017 Harvard Business Review article co-authored by former SBA Administrator Karen Mills puts it:
Banking for small and medium-sized enterprises (SMEs) has been astonishingly unaffected by the rise of the Internet. To the extent that banks have digitized, they have focused on the most routine customer transactions, like online access to bank accounts and remote deposits. The marketing, underwriting, and servicing of SME loans have largely taken a back seat.
According to a 2018 survey by the American Bankers Association, only 26% of banks are using some kind of digital loan origination channel for small business, and even that exaggerates things since only 12% support digitized document uploads and only 11% support e-signing of loan agreements. The FDIC, in its 2018 Small Business Lending Survey, corroborates this, finding that 23% of large banks and 11% of small banks ($10b in assets being the cutoff) offered online small business loan applications. A Bain report paints an event starker picture, finding that in 2015 only 8% of bank small business loan applications were submitted online and only 0.1% were handled digitally from end to end.
Some of this is surely due to banks anticipating business owner preferences for human interaction through what can be a complex process, but this is increasingly not the case. The Karen Mills HBR article quoted above, co-written with Brayden McCarthy of Fundera, cites research indicating that over 60% of small business owners would in fact prefer to apply for loans entirely online. And according to a 2017 report from McKinsey, 75% of small businesses use some form of digital engagement in their banking relationship and 80% begin researching credit products online.
Research firm Forrester found in its The State Of Digital Banking, 2018 report that 73% of US adults actively bank online while only 43% use branches, and another 43% bank exclusively online. As you might expect, the preference for doing things online gets more pronounced among younger business owners. According to a 2017 report from Oliver Wyman and Fundera, nearly all borrowers under the age of 35 expressed a preference for submitting documents online.
Furthermore, small business owners in general, and younger ones in particular, show less price sensitivity when a bank or lender provides value in other ways. According to a Wells Fargo study, 66% of “older” business owners agreed with the statement, “I am willing to pay a little more for products and services that help me do a better job running my business,” which could arguably extend to allowing them to apply for credit quickly online. That number rose to 76% for Millennial business owners, defined as those born between 1981 and 1997.
Many of the fintechs have exploited the preference among small business owners (and possibly also their lack of sophistication) to win them over with convenience and speed while charging fees and interest that can amount to APRs north of 50%, though they are rarely if ever advertised as such, and often seem deliberately described in ways that make them difficult to compare with traditional credit products.
While this, and an often “spammy” and “deceptive” approach to marketing (as well described in a 2018 report from the Federal Reserve Board), have hurt borrower satisfaction with online lenders, the fintechs have been cleaning up their act. For example, in 2015 an industry group formed the Responsible Business Lending Coalition and announced a Small Business Borrowers’ Bill of Rights, designed to promote better industry practices. And in 2016 some of the leading fintechs teamed up to launch the SMART Box initiative(for “Straightforward Metrics Around Rate and Total cost”), which promotes a standard template for disclosing fees and interest rates.
This, and perhaps the maturing of the market more generally, has had a noticeable effect on the perception of online lenders among small business owners. Although CDFIs and small banks remain by far the most favored lenders, net borrower satisfaction with online providers has risen from 19%in 2015 to 35% in 2017, according to the Fed’s 2017 Small Business Credit Survey.
All of this means that there are substantial and rising competitive pressures for small business lenders of all kinds to modernize their UI and UX. Thankfully, the tools and techniques for doing so are now available and have been proven in the marketplace. Here is a breakdown of how a lender can approach this challenge, taking in turn each stage of how a business owner interacts with them.
What matters most and how to measure results
Pre-application information transparency
Starting at the top of the funnel, when a prospective borrower is still deciding if and where to apply for credit, small business lenders can start by making sure they provide rich but clear information on their products and eligibility on their websites. Many banks already do this though there may still be lessons they could learn by looking at how the fintechs present their products.
It’s worth bearing in mind that most small businesses lack a dedicated, professional financial manager and so it can be helpful not only to explain the terms of any credit products you offer but also to give them tools to compare your products with others in the market, especially those that may not provide straightforward information about fees and rates. It may even be helpful to steer them to third-party resources like the SMART Box that can give them a sense of what to expect, or what to ask for, in comparing products. In general, the better informed a customer is the more likely they are to choose you as a lender for the right reasons and to be a responsible borrower.
Metrics to consider
All else equal, more information transparency should lead to a higher number of higher quality loan applicants. To effectively measure the value of an initiative here would require measuring the number of prospects who come to your website seeking information, how many of those convert to loan applications, and the quality of those applications. Of course, other factors have to be taken into account, including the overall credit environment and what may be driving prospects to your site in the first place – for example current marketing campaigns.
The online customer journey: application through funding
The real gateway step for a lender toward digitizing and modernizing their UI and UX – and their operations generally – is deploying an online loan application process. As described above, this is already the preferred channel for small business owners and that preference is only growing. The big reasons for this are to do with convenience and efficiency. People increasingly expect to be able to do their banking anytime, anywhere, on any device. Although the leading fintechs tend to be way ahead of banks, CDFIs and other lenders in this area they also have some major liabilities, notably a lack of strong relationships with quality borrowers, not to mention their cost of capital. A well crafted application process can provide a critical competitive edge, and its importance will only increase with time.
Here are some key components to consider when crafting an online application and thinking about applicant/borrower UX throughout the application process.
Ease of use
As any modern citizen has no doubt noticed, there is a huge difference between a well crafted web or mobile app and a bad one. There is a real art to this, and it often surprises first-timers how much thought and work it takes to create what may seem like a simple, intuitive web product.
One thing that is critical here is, again, transparency, though a different kind then discussed above. Here the thing that is important to be clear about is the process, and where the applicant is within it. One straightforward thing to do here is to provide a “map” and progress indicator showing what steps have been completed and what remains to be done, both for the immediate online application and perhaps also for subsequent steps. This is an area where the fintechs have so far maintained an edge. According to Oliver Wyman, borrowers from online lenders as compared with banks are half as likely to report being frustrated by not understanding next steps in the loan application process.
Pre-approvals and channeling
In a similar vein, it can go a long way to preserving good will even among applicants you decline if you can let them know if they are unqualified early in the process. In some cases you may even be able to steer them toward another product that they do qualify for, ideally preserving the information they have already provided if that requires a different application.
The same credit filters and business logic that can be used to pre-approve (or quickly and automatically decline) an application can also help determine whether additional credit information is required, and whether a complete application demands special scrutiny from underwriters. This can help efficiently allocate your internal resources and support faster decisions.
For banks, who have a huge advantage here given the rich data they have on existing clients and the potentially wide array of products they can offer them, these filters and business logic can also be used to target offers for clients based on what they may already pre-qualify for. This generally requires a separate system, but one that should ideally be integrated with your lending system.
Streamlining the process
Naturally, lenders will want to pre-fill as much application information as possible, and avoid any requirements for redundant data entry. For banks or lenders who are dealing with an existing client this is of course easier. In other cases, though, it is often possible to use APIs (application programming interfaces, bits of software that allow different applications to communicate over the internet) to gather information from a variety of sources on businesses and owners once the applicant provides their contact information and consent.
It is also be worth rethinking pieces of information that may have been required historically for a given credit product application. For example, bank transaction history data may provide better economic information about the business for some credit products, eliminating the need for financial statements and tax records, which are often dated.
For documents that are required, the state of the art has long been to allow applicants to upload documents directly via the online application form, and to view and replace documents once uploaded.
Speed of credit decision
Another critical aspect of creating a top tier UX for loan applicants is to provide timely credit decisions, and responsive communication throughout the process. There are a number of innovations that fintechs pioneered to make quick credit decisions, including both incorporating some new types of credit data and also eliminating some steps and types of information that traditional lenders required.
To ensure that you are striking the right balance between speed and efficiency on the one hand and effective credit risk management on the other, it can help to take a first-principles approach. To frame this, it is helpful to have a clear credit underwriting process map, where each input and decision node – and any supporting credit models or scorecards – can be evaluated against each credit product and borrower type. Having a clear understanding of the credit decisioning workflow can help uncover areas where the process can be streamlined to improve speed and consistency.
One aspect here we touched on but that warrants special attention is how you categorize applications. It may be possible to channel higher-quality applicants for smaller or shorter duration loans through an expedited process. It may even be possible to automate decisions in some cases, or at least to determine which applications need closer scrutiny and to equip your underwriters with the right information and tools to efficiently evaluate the applicant.
Innovations in the credit underwriting area will be discussed further in a future article in this series.
Closing and origination
Once an affirmative credit decision has been made, presenting an offer to the applicant (or perhaps multiple offers for them to choose from) and then walking them through the closing process is another area where there is a big gap between leading fintechs and traditional lenders. A sophisticated “customer portal” (ideally using the same interface and login information used to apply for a loan) can support this process as well, generally augmented with email and perhaps text-message communication. As outlined in the table toward the top of this article, a modern process generally allows the applicant to accept an offer via the customer portal and then presents them with automatically generated closing documents which they can sign electronically (as well as review and download at any time). Once this is done, the loan is generally put in a queue for funding and the borrower is kept notified of the funding status and upcoming payments.
Metrics to consider
An improved application-through-funding process should lead to a higher conversion of applicants of equal or higher credit quality as well as substantially reduced marginal costs. The lower marginal costs can also open up other possibilities. For example, a lender may determine that smaller and shorter duration credit products are now profitable and add these to its offering.
Modernizing and digitizing the process will of course require an investment of time and resources. That upfront cost needs to be weighed against the prospective value from reduced marginal costs, higher conversion of applicants to borrowers, higher customer satisfaction (which drives retention and referrals), higher credit quality, more consistent underwriting standards (which may ease auditability and boost capital efficiency), and more lending profits from any expanded product offering.
Servicing and ongoing borrower support
The final area where we’ll consider the value of recent technology-enabled improvements in UI and UX is in loan servicing and how borrowers engage with lenders during the life of a loan. The most obvious way this has been improved is one that is not particularly sophisticated and has been available for a range of credit products for some time: automated payments. Some borrowers may still prefer the perceived control they have by writing checks or manually triggering electronic payments, but in general automatic payments will improve loan performance and eliminate a host of headaches and inefficiencies for all parties. One thing worth noting here is that many of the fintechs have opted for weekly or even daily payments rather than the more traditional monthly cycle. While part of the appeal has no doubt been to be able to advertise a lower apparent payment amount to potentially unsophisticated borrowers, it also provides value to lenders by giving them earlier notice if the borrower is in trouble since they won’t have to wait until the end of the month for a missed payment, and they would have continued collecting payments right up until then.
Here again a sophisticated online customer portal can be a big improvement over legacy systems if it can support self-serve loan account management for borrowers. It can also provide a huge advantage when it comes to dealing with special servicing and collections for troubled borrowers. The same is true for engaging in constructive ways with healthy borrowers, for example by setting triggers for offering them renewals or upselling or cross-selling opportunities. Offers can be automatically presented to healthy borrowers, or relevant information and notifications can be directed to account managers.
Metrics to consider
A better servicing and borrower support system can potentially lower delinquency rates, improve customer satisfaction (leading to higher retention and renewal rates), and can substantially reduce marginal costs while improving consistency in portfolio management.
How to go about modernizing your UI & UX
Here are some suggested principles and guidelines for undertaking an initiative to upgrade and digitize how you interact with small business clients (though this is also something we’ll cover more fully in a later installment in this series).
One key principle is that it is important to take a holistic approach. Simply tasking a web development team with creating an online application for a legacy lending process will at the very least fail to capture the full value of such and upgrade, and also risks creating a disjointed experience that could introduce headaches for your applicants and your staff. It is also very likely to lead to a miserable experience for the developers and lending staff, since the entire project will be heavily compromised from the start.
To get the most from a thoughtful application of the tools and processes pioneered by the fintechs will require a fuller rethinking of your lending operations including product offering, credit underwriting, personnel, and reporting rules. It may also require engaging across departments that have traditionally been siloed off from small business lending, or integrating certain data sets or consolidating and streamlining approval authority. At the very least, staff that are involved with any digitized system will need to be trained and perhaps also engaged in the process of designing and integrating it. The better digital lending platforms will give users on the lender side full visibility into applications at every step in the process, and will equip them with tools to take appropriate action if an application appears to be stalled.
For many institutions (and in particular for banks) a lot can be gained by taking a fresh look at the needs and activities of small business customers. For example, it may be worth looking into how many business customers are currently repaying loans or merchant cash advances from their operating account. These businesses may be candidates for credit products that you can offer them, perhaps on far better terms. And if you don’t currently offer comparable products, it may be worth considering what the economics of such offerings would be with a more digitized system to support them. It is worth bearing in mind that 65% of businesses seeking financing are looking for less than $250k, and 55% are seeking less than $100k, according to the Fed’s 2017 Small Business Credit Survey.
It may also be possible to set up filters and triggers to offer or pre-approve products to business that hit certain cashflow or growth thresholds. Being able to intelligently do this can dramatically improve the customer’s overall experience with the lender.
Any effort to modernize your UI and UX will require some degree of design and engineering work. Broadly speaking, this can be done in-house or outsourced, or you can integrate with a third-party system, such as the one offered by LendingFront. Third-party systems come in a variety of flavors ranging from those where the system provider actually owns the loans to white-label models, like LendingFront, where the lender or client retains full control over the product mix, credit decisioning, loan portfolio, and customer relationship.
In all cases it makes sense to go about the project in a deliberate way and to be prepared to allocate appropriate time, resources and staff to make it work for the needs of your business. A poorly executed effort in this area can drag on for months or even years with compromised results, while a well executed one has the potential to energize your business and yield substantial benefits in all the areas that matter, from employee morale, to serving more customers, to improved customer satisfaction, to boosting profitability and return on assets and equity.
The previous article in this series gives an overview. Up next: innovations in small business credit underwriting (coming soon).
LendingFront offers a full suite of software for small business lenders. Go to our homepage at lendingfront.com to find out more and request a demo.