Automation gives lenders clear advantage over competition

The past six months have been anything but normal for the automotive industry. Pandemic-driven chip shortages are still constraining inventory, which places inordinate stress on dealers. Although a lack of inventory tends to lead to mark-ups on MSRPs, the reduction in inventory and overall loans has presented a unique set of challenges that have lenders scrambling for deals.

When dealers can only sell so many cars, lenders are under pressure to close deals as quickly and accurately as possible to capture available opportunities. Creating a competitive edge is a challenge even under the best of circumstances, but when new deals are few and far between, the ability to run a tight ship becomes crucial. This leads to a resurgence in refinancing.

To maintain volume in a shrinking pool of new applicants, lenders are looking to steal existing loans away from competitors, gaining revenues from vehicles that do not change hands. Thanks to streamlined fintech refinancing solutions, lenders can grab consumer loans from a competitor with minimal friction — just a few clicks — and gain a revenue stream that does not require new inventory.

The winners are lenders who leverage automation to expedite the approval process. Efficient, automated loan origination technology will become a cornerstone for lenders who are chasing those elusive deals in the coming year.

Use of AI and OCR to increase speed

New artificial intelligence (AI)-powered capabilities are improving the speed and quality of the loan origination process. Advances in optical character recognition (OCR) have allowed lenders to automatically index and sort documents, process signatures and convert paper-based documentation to electronic form, further accelerating the underwriting process. AI and machine learning capabilities are rapidly becoming key differentiators that enable lenders to satisfy customer demands while lowering operating costs.

Alternative data lowers risks, improves approval rates

Automated systems provide the advantage of mining credit risk assessment criteria — such as income verification and utility information — from a multitude of sources, including utility and cable bills. When the baseline of new loans is at a critically low volume, alternative credit data becomes a powerful differentiator in accelerating the decisioning process.

An automated loan origination system (LOS) identifies data patterns that indicate the applicant’s risk level, allowing lenders to make informed decisions quickly. It provides vital insights into an applicant’s profile that aren’t revealed in a bureau report. Use of utility bill payment history has proven to create a 60% increase in credit approvals for near-prime consumers, according to the Center for Financial Services Innovation.

Alternative data was originally used only in the sub-prime arena. But since automated LOS technology has made this added data more widely accepted, prime lenders and larger financial institutions are using it to better optimize their processes. This data is being implemented in score cards to help lenders close more deals and approve more applications. The use of alternative data has also been associated with a decline in defaults.

Automation addresses labor shortage

To complicate matters, the current worker shortage hasn’t skirted the financial sector. Lenders have fewer deals to compete for and less staff to process and manage loans. Automation can reduce the time and effort involved in the credit-decisioning process, which can be managed by a smaller team of people.

Although the industry had at one time been dependent on face-to-face transactions, the pandemic caused lenders to re-examine their models and shift more of their processes online. The industry’s newfound adoption of digital loan origination is one of the few bright spots to emerge from the pandemic. The benefits of automated LOS and learning management solutions will only become stronger in the coming year.

Just as COVID-19 numbers continue to decline, electronic chip shortages and other supply chain issues will start to resolve themselves in time. Still, the pressure will certainly remain on lenders to process all loans — both new deals and refinances — as quickly and accurately as technology allows.

Bob Metodiev is the head of business development at Inovatec.