Banking's Digital Loan Applications Won't Fly Without Flexibility

Recently I received an offer for a low-interest personal loan from the bank that holds my mortgage. Having just purchased a new home, I figured I’d apply and use the funds to complete a few minor renovation projects. And why not? The digital loan application process seemed so straightforward — on the surface.

However, the digital process was tripped up by a seemingly minor question about income verification. That forced my application into manual review without any way to resolve the issue digitally. This resulted in my being pushed into a manual process that would have likely taken days, if not longer, to complete.

This certainly did not make me happy. After all, I had only recently provided my full income picture to the bank as part of the mortgage application. Given the friction, I abandoned the so-called digital account-opening process. In the “instant” world in which we now live, no doubt many other high-quality customers are also abandoning digital applications like these when unneeded hurdles arise.

Digital Account Opening Success Remains Elusive

Despite all the digital progress over the past few years, many banking institutions still have trouble providing a decent digital account-opening experience. Many institutions have mastered the initial application process, but the majority still have gaps in their back-end decisioning that prevent consumers from reaching a satisfactory conclusion to what should be a simple online process.

Today banks and credit unions have an opportunity to redefine their workflow strategy. They can do so in a way that keeps potential customers on a “happy path” to a resolution and eliminates tedious customer experiences that lead to high abandonment rates.

Financial institutions need to offer digital capabilities to customers where there is a material benefit and value, while also having intelligent discretion on how, when and where to add manual levers to the application review process and incorporate them in a way that complements the overall strategy, rather than distracting or disrupting it.

Easier said than done. The optimization of that “happy path” is difficult for banks and credit unions to implement. However, there are three main focus areas that banks should prioritize to improve success rates.

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Focus #1: Ingest and Digest Critical Consumer Credit Data

Banks and credit unions will be unable to resolve shortcomings in their digital application processes until they address data collection methods used to create the path a customer takes for an online loan application. Most institutions struggle to put together the right data combination for better decisioning. That’s because the current risk logic being used does not allow for nuances that can be dealt with additional sources.

“Most institutions struggle to put together the right data combination for better decisioning.”

Lenders should implement data from three key sources: third-party data from outside vendors (to validate identity, creditworthiness, etc.); their own internal customer data (including information on previous loans and direct deposit); and the applicant’s own personal financial data (such as employment history, income, and loan purpose).

In theory, this information can help make the application process smoother, especially for returning customers. This also helps the banking institution identify and re-route high-risk customers during account openings, therefore mitigating fraud and associated costs.

If a current mortgage customer, like myself, comes back to their bank or credit union for a personal loan, the institution can forgo steps such as income verification. After all, the lender just confirmed my income two weeks ago for the mortgage. Already equipped with this information, the institution can avoid sending me down a redundant and unnecessary path in the process.

The combination of the aforementioned information will help a lender create the best policies using that data.

Focus #2: Build Dynamic Policies that Adjust to Loan Applicants’ Circumstances

Once lenders ingest and digest that critical customer data, they can then create a policy that ultimately determines the path an individual customer will take during the online application process. And therein lies the problem most banks and credit unions have: Creating the right model can be basic or complicated, depending on risk tolerance. Most banking institutions’ policies are unable to deal with complex situations that arise.

“Most banking institutions’ policies are unable to deal with complex situations that arise.”

Policy models are based on “if, then” logic. Does the lender need to verify income for this specific product? Yes. Do I have information on this client already? Yes. How many weeks has it been since we verified income? Four.

That data combination can put the customer down one path and bypass potential roadblocks that might be needed for brand new applicants to the bank or credit union. The product will determine how complicated the policy needs to be, and will depend on the sophistication of the financial institution and its risk tolerance.

The issue at hand for most banking players is they initially struggle to get the right data. But even if they have the right data, they struggle to build policies that are dynamic. They can’t hope to rely on a one-size-fits-all approach.

Focus #3: Create Tailored Customer Journeys to Smooth Online Application Bumps

The final step financial institutions need to implement is creation of a customer journey that aligns to their risk profile. Instead of defaulting to a manual process, how does a financial institution create a digital path that enables it to satisfy risk?

If we re-examine my income example from earlier, a banking institution can create a policy that gives an applicant two paths.

On Path 1, the lender already has the client’s income data from a previous application, which gives it confidence to skip this step for the customer and put them right into the flow of the digital application.
On Path 2, the applicant may be a new customer, or they need to re-verify the income because more time has passed than policy covers.

In Path 2, the institution can first leverage open banking tools to estimate a customer’s income from their checking account deposits or leverage compensation data via a large payroll vendor. Either of these options keeps a customer in the digital channel, with the fallback strategy being a more traditional paystub upload and review process.

In the end, banks should not ignore any type of risk, but find ways to handle traditional manual processes in digital ways.

Recognize Your Digital Application Gaps, and Close Them

Financial institutions are increasingly turning their attention to gaps in the digital experience. They often can handle the simple path in the application process, but today the challenge is more about the complexity of exceptions. Which path does the customer travel if they are a freelancer or otherwise part of the gig economy? Or on government benefits? These are exceptions lenders must be prepared to address in a digital manner.

When banks started to digitize loan applications, they were not thinking about these exception scenarios. They just wanted to plant a flag on digital channels, and thus have tended to create rigid one-size-fits-all paths. However, what works today will not work tomorrow as the industry — and your competitors — continue to evolve with lending fintech honing their technology and offering consumers a happy digital path to an all-online transaction.