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Overcoming three key challenges facing the lending market
By Rick Browne, Regional Vice President of Sales, Financial Services for APJ at Appian.
The financial services market is ever-changing, so it is crucial for lenders to adjust as market conditions and regulations evolve. Lenders must constantly balance innovation and efficient process execution with risk.
Over recent years, three key forces in the lending market have led to increased complexity and unpredictability in the financial services industry:
Lending rate volatility
In an effort to control inflation within Australia, the Reserve Bank of Australia (RBA) has increased interest rates by 50 basis point in June and further increases are expected. The increase in interest rates, coupled with a continuation of the tight housing inventory, will increasingly pressure mortgage lenders to reduce approval time—either to meet consumer demand to close on sparse inventory quickly, or to lock in rates before another potential hike.
The same goes for commercial lending. Financial institutions must quickly assess risk and meet customer demands while still tending to the bottom line.
The final days of LIBOR?
The London Interbank Offered Rate (LIBOR) is the benchmark interest rate at which major global banks lend to one another. It has been used as a reference rate for many financial products for decades, including mortgages.
LIBOR is largely based on estimates from global banks who are surveyed and not necessarily on actual transactions. LIBOR was discredited after the 2008 financial crisis, when authorities discovered traders had manipulated it. Questions around its validity and calls to reform the rate have since led to its demise.
The LIBOR was started to be phased out at the end of 2021 and will be replaced by alternative indices, such as the Secured Overnight Financing Rate (SOFR) and the Bloomberg Short-Term Bank Yield Index (BSBY) by June of 2023. However, the transition has been challenging as there are trillions of dollars of LIBOR based contracts. Adding further to the challenges of moving away from LIBOR, it is anticipated that many countries will adopt an alternative standard to SOFR.
The rise of ESG
Environmental, social, and governance (ESG) lending is rising as consumer demand calls for ESG-friendly investments. In the first 11 months of 2021, more than $649 billion was invested in ESG-focused funds worldwide, up from $542 billion and $285 billion in 2020 and 2019, respectively.
With more investors including ESG criteria in their investment decisions, banks face increased pressure for greater adoption of ESG and sustainable finance and must adjust internal processes accordingly.
An Accenture report found that sustainable lending skyrocketed from $5 billion in 2017 to $120 billion in 2020.
The report stated: “ESG impacts the entire lending process and value chain. Banks have made significant investments in straight-through processing, automating document collections, developing e-documentation and reducing collaterals. Moving to green lending carries the risk of falling back on cumbersome manual interventions. Leading banks will thus include ESG considerations in lending decisions, while building on the investments they have made in automating and speeding up credit processing. They will look at transforming their lending value chains, building ESG data platforms and re-skilling lending practice teams.”
The changing landscape requires agility
The lending market has become increasingly crowded and complex. As the economy improves and rate hikes loom, the demand for lending and increased speed of approval will rise as home buyers and businesses look to swiftly secure deals.
The financial institutions capable of capitalising on the revenue-generating opportunities offered by rate increases use technology that gives them a competitive edge.
The problem for many financial institutions is their legacy technology doesn’t enable them to be agile. Teams that work together to meet an institution’s goals and serve clients aren’t given the tools they need to optimise service delivery.
The ecosystem of loan origination and servicing systems is often too slow to react to rapidly changing regulations and the needs associated with them, nor does it cover the end-to-end lending process from prospect to servicing and back to origination.
The reality for so many institutions is that disjointed data spread across many systems and manual workflows take time away from value-driven work.
Meeting the challenge
A unified low-code platform eliminates the need to replace these legacy lending solutions and instead brings them together to enable faster, more informed decision making. Low-code accelerates creating and changing new apps and workflows by 10x. As importantly, low-code unifies data from disparate sources without requiring any data migration.
The right low-code platform can simplify the entire loan life cycle—from origination, underwriting, and collateral management to servicing and reporting.
Low-code provides financial institutions with greater agility through:
- Native automation functionality that improves efficiency. This includes the use of Intelligent Document Processing, artificial intelligence and machine learning tools that avoid the pitfalls of traditional credit scoring methods and improve straight through processing.
- Fast, flexible, and simple integration across all loan categories—consumer, commercial, and wholesale lines of business.
- Adherence to local, product, and customer-specific regulatory guidelines.
- Improved visibility for a shorter time-to-decision and better credit evaluations.
- Enablement of employees to engage in risk analysis and customer relationship management rather than mundane, administrative tasks.
- Integration of legacy systems and disparate data sources for faster reporting and decision-making.
A low-code platform can overlay and orchestrate the entire lending lifecycle. When regulations change, that workflow orchestration can easily be adjusted accordingly. Financial institutions using such a platform are ideally placed to remain competitive during the post-pandemic economic improvement.