Trends in Digital Banking: For Lenders, Change is Constant
In lending, the ability to adjust in response to evolving market conditions has always been a prerequisite for success. Never has this been more true than in the post-pandemic new normal, where the only thing that is constant is change.
Recently, leaders from the banking industry gathered at Digital Banking 2021 to discuss up-to-the-minute trends and recently developed technology for the largest banks and credit unions, while examining the latest innovations and adoptable best practices from challenger banks and fintechs. DocuSign hosted a session with Joe Ehrhardt, CEO of Teslar Software, and Ben Miller, Co-founder of SimpleNexus, in which the industry experts discussed current trends in commercial and residential mortgage lending, and how the digitization of lending processes will help lenders compete in 2022 and beyond.
In the session, Ehrhardt and Miller offered some advice for lenders. First and foremost, in times of rapid change, it’s important to take care of the needs of your existing customers by ensuring they have an outstanding customer experience.
“The most important sale is to an existing customer,” Ehrhardt says. “They're easier to get because they're loyal. If you’re only going to worry about new customers, and build all your technology for new customers, your existing customers will leave you and become the new customer somewhere else. So, we stress to our banks, focus on aspects like making renewals and covenants easy, to take the best care of the existing customers. Provide your borrower with the tools to enable them to do their banking on their time.”
Meanwhile, Miller urges bankers to innovate through technology partnerships to improve efficiency and profitability in their lending operations.
“Even before the pandemic, other lenders have adopted technology to be more efficient and to create better experiences,” Miller says. “And that's where the deal flow is going to go. Reality is hitting a lot of lenders like a bus right now, as volumes and margins fall off. It’s really about seeking the best of breed, and not settling for a solution just because your LOS provider includes it as part of the package.”
Digitization arrives in commercial lending
As a relationship-driven business, commercial lending has long been outpaced by mortgage and consumer lending in the deployment of new technologies. According to Ehrhardt, the COVID-19 pandemic has accelerated digitization in the sector.
“Commercial lending was always a laggard,” Ehrhardt says. “It was a relationship-based process where everything was done face to face. COVID changed that overnight – as it has changed a lot of things.”
Ehrhardt noted that the federally administered Payroll Protection Program (PPP) opened the eyes of many in the industry, encouraging a growing appetite for government-backed loan programs like U.S. Small Business Administration (SBA) lending and driving recognition that even business borrowers desire an outstanding, digital-first experience
“How do you keep that customer relationship,” Ehrhardt says, “while bringing in best of breed tools to digitize the commercial process?”
Ehrhardt advised lenders to keep a sharp eye on other emerging trends in the industry this coming year, including impending compliance changes from the Consumer Finance Protection Bureau (CFPB), like the extension of Section 1071 data requirements to business lending. To handle these new, data-intensive compliance standards, lenders will need efficient, frictionless methods for receiving data from borrowers.
Mortgage lending rollercoaster ride set to continue
Over the past few years, historically low interest rates have driven a massive uptick in demand for residential mortgages. This has helped boost lenders’ profit margins, making mortgage lending a very lucrative sector of the banking business.
“In 2018 and 2019, the mortgage industry was in an increasing rate environment,” Miller says. “Lenders had to be nimble and react to that. When rates dropped in 2020, it served as a catalyst for refinance and purchase activity, resulting in tremendous volumes throughout 2020 and 2021. Now we're starting to see some pullback, so the only constant is change.”
Miller points to digital innovation, specifically through Software as a Service (SaaS) solutions, as a way for community lenders to maintain competitiveness in the dynamic mortgage lending market.
“Lenders are striving to adopt digital processes to help them become more nimble and more efficient,” Miller says. “Smaller players like community banks and credit unions are able to leverage SaaS offerings with the firepower of a lot of financial and technological resources to create digital experiences and to begin to level the playing field. Now there's more parity in the experience, as more lending institutions adopt these digital technologies.”
Miller shared the experience of executing an electronic signature on a mortgage document as an example of how far the lending process has evolved in just the past few years. Although electronic signature has been available to lenders for years, it was primarily an email-driven, inefficient process. Now, signature capture and document sharing are fully integrated into the holistic loan cycle workflow.
“In the before picture, it would take roughly two and a half days to execute an electronic signature on a document,” Miller says. “Now, we have embedded DocuSign into an integrated, single-platform, mobile-first experience. When a disclosure is initiated from the loan origination system, we're able to take that in seamlessly, pass it over to whoever needs to sign – whether the borrower or the loan officer— and generate a push notification, which has a much higher reading receipt. They just tap it and they're able to sign on their phone. The entire process has been condensed down to two and a half hours, and it is a better, more elegant, electronic process.”
Buy vs. build: What has changed?
According to Ehrhardt, financial institutions deploy technology in their operations for three reasons: To make more money, to improve efficiency, or to meet compliance requirements.
Although these reasons have remained consistent for years, the decision calculus around whether to build technological capabilities in-house, or to buy from a best-in-breed vendor has changed. Specifically, the decision to buy is now easier than ever, thanks to the rapid rise of cloud-based solutions and the unprecedented connectivity and integration that are achievable throughout the technology stack.
“In the traditional build versus buy economy, lenders were always trying to figure out whether they should build the solution, and maintain it,” Miller says. “Whereas before you might've been able to compete in that space, the technology is growing and advancing so quickly that financial institutions just can’t keep up with SaaS companies that are solely focused on building technology. Lenders have to decide what they are going to be the best at – being a lender, or building technology.
“Now, lenders can reduce their costs by leveraging industry best practices or best of breed solutions and differentiate via the experiences they provide through their human connections and interactions.”