Getting approved for a loan is a tedious process. Shopping around for the best rate and digging through everything from a tax return to a birth certificate can sometimes make it profoundly difficult. As lenders and other financial institutions move to a fully digitalized underwriting process, however, borrowers do have leverage in making the approval process as easy as it can be. Greater transparency and the ability to shop around through a wider selection of lenders are just two of the benefits of online lending.
More importantly, borrowers can also seek advice and guidance relevant to their situation. Whether a family is looking to purchase a home while saving for their children’s education or a small business is looking to buy equipment for an influx of new orders, it is important to know that no one is an island. Consultants, calculators and entire blog columns are dedicated to helping shed light on confusing questions.
While the fundamentals (tax returns, Social Security information, income verification, etc.) still remain the same, the way that underwriters view this information has changed. Lenders who enjoyed a traditional relationship-based business with borrowers can now improve their practices with technology, leveraging applications and platforms that can save time and money for both borrowers and lenders alike.
Underwriters are now aided by quantitative algorithms that can create funding models to reduce a borrower’s payments by hundreds of dollars a month, such as those utilized by lender ZestFinance.
ZestFinance’s goal of leveraging quantitative analytics in credit risk management mirrors strategies used by traders in the investing world, capturing and analyzing numerous data patterns and bits of information to create a clearer picture.
A report by McKinsey & Company regarding trends for the financial technology (fintech) sector notes that for lenders, creating a technological platform will not only provide a more user-friendly experience for borrowers, but also help traditional financial institutions compete with new players and reduce costs.
An excerpt from the report states: “The proliferation of mobile devices and shifting preferences among demographic groups mean that customers expect more real-time, cross-channel capabilities (such as status inquiries and problem resolution) than ever before.
“Physical distribution will still be relevant but far less important, and banks must learn to deliver services with a compelling design and a seamless unconventional customer experience,” it continues.
The McKinsey report explains that the development of such processes is absolutely essential to the continued ability of a traditional financial institution to effectively serve its clients in today’s tech-driven world.
“Simplification, digitization, and streamlining opportunities exist across large swaths of banking operations,” it declares. “The sooner banks attack these opportunities, the more prepared they will be to compete with fintech attackers that have a structurally lower cost base. New technologies will offer banks opportunities to test and scale to achieve efficiencies.”
Echoing this sentiment is John Flahive, director of fixed income at BNY Mellon Wealth Management. He touched on the importance of fintech for financial institutions during a recent speech at Garden City, NY-based Adelphi University, in which he also shared his thoughts on investment management, quantitative analytics, and how financial professionals will view and use fintech in the future.
“You can’t learn all of this in a classroom,” Flahive said of the many recent developments within the financial industry. “But the people who are going to survive are going to be the ones with the quantitative skills.”
A 2014 study by Robinson & Yu, a public policy advisory firm, examined quantitative underwriting methodologies. ZestFinance was featured as an example of big data underwriting and how quantitative processes will drive the sector going forward. However, the report touched on the company’s underwriting process as being based on “fringe alternative scoring models.”
Online Marketplace Lending Organizations
To address the criticisms the industry faces, several marketplace lending organizations recently banded together to found the Marketplace Lending Association, the first such trade association in this sector. Part of the mission of the organization is to establish best practices and help marketplace lending companies educate the public about their products and services.
Many industry professionals believe that education for both lenders and borrowers will go a long way in alleviating early adaptation issues. Even as persistent issues—such as data security, education, and training—still remain, these challenges are no different from any other type of financial innovation that has taken place in the past. Many of these same criticisms were also levied against online financial advisors in their infancy, for example, and now they play an everyday role in the wealth management world.
As online financial advisors made the investing process more streamlined and transparent, the online lending marketplace will do the same. Simply click and borrow.
Guest Author Bio
Anthony Orbanic is the Financial Editor and contributor to the New York Financial Press. Previously he has worked as a financial advisor and investor services analyst for some of the leading finance companies in New York, continuously leading his clients to success. With a diverse, in-depth knowledge of the financial industry, Anthony’s expertise and advice is some of the best in the business.