Enhancing Lending-as-a-Service: A Data-Driven Approach to Collections, Recovery and Comprehensive Portfolio Monitoring for Business Banking Success
While still relatively new to the marketplace, LaaS has already demonstrated success in streamlining the loan origination process, including automating borrower applications, onboarding, credit decisioning and loan processing. With the next iteration of LaaS-powered origination, banks are realizing the need for data-driven processes like automated KYC/KYB, leveraging third-party APIs to mitigate fraud and utilizing AI-powered analytics to originate a healthier portfolio.
Unlike traditional approaches to the lending process, LaaS positions FIs to quickly pivot and enter new lending sectors by leveraging alternative data sets to expand availability of credit to a network of new borrowers and grow the lifetime value of existing customers. Augmenting the assessment of borrower risk with AI provides loan officers and underwriters with real-time insights to measure creditworthiness, mitigate risk, stop fraud and create more personalized offers, while also promoting operational efficiencies.
To date, LaaS has been utilized primarily to support consumer lending within retail banking, but its value extends to business banking as well. By providing small businesses (SMBs) with access to credit more easily while reducing the time and cost associated with traditional manual underwriting methods – particularly for small dollar business loans – LaaS is enabling bankers to grow their business banking portfolios more readily and responsibly. It also delivers a more pleasant and timely experience to SMBs in need of capital, thereby increasing customer engagement and loyalty with the bank. While many bankers may think about LaaS only in terms of supporting loan origination, for SMB lending its impact extends to loan servicing and portfolio management over time, through capabilities including:
- Ongoing monitoring of borrower business financial health after financing using automated cash flow analysis, debt-to-income (DTI) ratios and analytics to monitor financial wellness. This also includes changes to the business that might negatively impact ongoing ability to pay or, conversely, reflect positive growth for the business to support expanded lending opportunities, allowing banks to take a proactive approach to managing situations before they become issues.
- Periodic refresh of financial data and credit data to help with monitoring the financials of the borrower and guarantors, allowing banks to identify trends through additional debt or declines in receivables that may negatively impact their ability to re-pay.
- Full integrations with banks' existing servicing systems of record across product relationships, streamlining review of re-payment performance side by side with the financials and other data sets to fully understand loan performance.
- Active monitoring of loan servicing and borrower business payment patterns, and trigger-driven real-time alerts for bankers if patterns change over time.
- Data enrichment and AI to power notifications and alerts when businesses change profiles, or new businesses are formed with same data patterns or contact information changes, enabling banks to proactively monitor portfolio changes.
- Applying rule-based decisioning to the loan renewal process to support more efficient credit risk management and streamline the customer experience, while rewarding good performing borrowers with additional capital or other value-added services to build portfolio loyalty.
The Realities of the Current Economy for SMBs
As the current economic environment evolves, it is imperative that banks leverage these monitoring capabilities to detect potential financial disruptions affecting SMBs in their portfolios. This is especially relevant today, where small businesses are struggling due to rising inflation, labor shortages and the ongoing effects of the pandemic. 45% of small business owners report that they are expecting worsening business conditions in the coming months, and 57% of these businesses expect capital outlays in the next six months, which will push them to tap supplemental funds for maintenance, upgrades and/or repairs.
The pandemic uncovered some shortcomings in terms of banks’ ability to quickly respond to SMBs and their need for fast access to vital capital. This unmet need created an opportunity for larger institutions and innovative fintechs to gain market share from many community and regional banks. Bankers want to serve their business banking customers and respond more quickly to their needs, but they must be able to do so in a way that is risk responsible for the institution.
LaaS systems with a data-driven focus equip bankers with a more comprehensive view of their SMB customers' financial health by accessing alternative data from a range of sources, along with insights into small businesses' revenue and expenses, cash flow and creditworthiness. This information helps banks better mitigate the risk of loan defaults by monitoring any changes to creditworthiness of existing borrowers and overall performance of their loans in real-time. This enables bankers to more readily identify potential problem loans early and take corrective action before they become delinquent.
For those loans that do fall into default status, LaaS systems built to power collections and recovery support the ability for collection departments to continue engagement with borrowers until issues are resolved. With any change to the financial status of a business, for example, the platform can automatically prompt the collections team to proactively connect with a debtor to initiate resolution.
This combination of historical data, paired with continuous real-time monitoring, empowers bankers to better piece together information on individual small business owners and determine their true financial profile. A common example might be a pizza shop owner in California whose business goes under. A year later, he then opens a sandwich shop in Wisconsin and applies for a new SMB loan using the same social security number. Using LaaS tooled with ongoing collections and recovery capabilities enables the account creditor to leverage this information to resume efforts to collect on the debt, such as executing on a previous judgment against the shop owner in light of the new business venture.
The promise of LaaS is in its ability to revolutionize small business banking by providing bankers with a more comprehensive view of their customers' financial health, greater access to credit and more efficient lending processes. As LaaS continues to evolve, it will be characterized by a deeper intertwining of banks and their fintech partners, with each bringing their own strengths to the table. Banks provide a stable source of capital and loyal SMB customers, while fintechs offer speed and expertise in data-driven credit decisioning and loan servicing – together creating a value-chain partnership that benefits both the bank and their business customers over time.
