Underwriting is at the very heart of the credit business. Gathering and analyzing information about a person or business to determine whether to offer credit and on what terms is arguably the central craft in all of finance. Given its importance, and the tendency of new entrants to underplay risk as they rush to grow market share, it is understandable that veterans in the lending business are skeptical about innovations in underwriting.
As discussed in the first article in this series, much of what characterizes a good lending business has not changed, but some things certainly have. In this piece we’ll look at what some of the most sophisticated small business lenders and “fintechs” are doing in this area, and map out how a lender looking to achieve the best possible efficiency and effectiveness in underwriting might approach this challenge.
New data sources
The first task of an underwriter – human or machine – is to gather and verify all pertinent information about a loan applicant.
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.
Here are two important truths about the credit business, one popular and the other unpopular, though which you think is which may say something about your biases:
No innovation in the past decade – and indeed longer – fundamentally changes the lending business
The past decade has seen a number of important innovations that no lender can afford to ignore
These seemingly contradictory assertions are actually complementary, and can be useful to frame a discussion about what has really changed and what has “stayed the same,” helping guard against complacency on the one hand and naive risk taking on the other.
This piece is the first in a series the LendingFront team will publish to help our colleagues in the business of providing credit to small businesses to understand the major technological and market developments affecting our industry, to put them in context without losing sight of fundamentals, and to position yourself and your company to thrive.