Lenders Focus on Customer Relationships
Lenders find themselves in a very different world from just two or three years ago. Interest rates and loan delinquencies are on the rise, the refinance boom has petered out in the face of a declining housing market, and regulators are slowly turning up the heat as they examine questionable lending practices. As a result, lenders are challenged to find ways to grow revenue in a more risk-averse climate. As always, technology is playing a key role in their efforts to adapt to the new market conditions.
According to J. Brian King, senior vice president and practice manager with Atlanta-based Benchmark Consulting, the changing business climate, including the bursting of the re-fi bubble, isn't necessarily a bad thing since it's allowing lenders to take a step back and reevaluate their processes and products. "There's more of a focus on portfolios now," he says. "With the significant growth we saw over the last few years, lenders were not watching their portfolios closely because of the huge volumes they were dealing with. Now they have some breathing room to do so."
TowerGroup research area director Craig Focardi says that in light of the rising loan delinquencies -- both in the prime and subprime areas -- lenders are now reviewing their underwriting guidelines and implementing changes to their systems. "The speed with which a lender can do this is a source of competitive advantage," he explains. As such, lenders are looking to improve their core loan origination systems, Focardi adds. "They're moving away from mainframe/client-server systems to more Web-based, componentized systems," he continues.
Although the older systems are tried and true, lenders are hindered in their innovation efforts by legacy infrastructures, contends New York-based Mercer Oliver Wyman's (MOW) Andrew Dresner, director, strategic IT practice. "Most lending platforms use mainframe technology and are designed to be efficient," he says. "But once you start to truly innovate, there's the problem of not being able to roll out new functionality in less than 10 or 18 months. It's not just the legacy platforms either, but the compliance and training issues that go around implementing something new."
Moving away from traditional IT infrastructure will afford lenders the ability to be more flexible and streamlined, Benchmark Consulting's King adds. This becomes especially important as lenders push for greater speed on decisions and loan closings, he says. "The focus now is on automated decision capabilities with no human intervention," King relates. "This functionality is important, and some loan origination systems (LOS) have this built in. Lenders want to reduce the days it takes to close a loan. The quicker you can close a loan, the less likely you are to lose it."
While part of banks' efforts to become more nimble is deciding whether to replace legacy systems, Ted Landis, a senior executive with Accenture (Chicago), points out that banks can better use what they already have in place. "How do you maximize the investments you have today and allow yourself to move into the newer opportunities to better exploit loan processing?" Landis poses. "You can create great efficiencies with business content management and imaging technology" by placing this atop existing lending core systems, he asserts.
Systems Integration: The Road to STP
Straight-through processing (STP) is a fundamental element in an automated lending environment. Banks and other financial services firms have been striving for this fully automated, paperless ideal for years and have found some success. However, experts disagree on the degree to which STP is possible in lending today.
TowerGroup's Focardi sees STP as more of a long-term goal. "STP is analogous to putting all the pieces of a large puzzle together," he explains. "Imaging and content management is being integrated into lending and workflow systems to improve parts of the lending process. Some portions of the lending process are very automated, such as underwriting and the collection of loan applications. But connecting the data and the documents is the most important thing." Focardi says the industry is just starting to understand these concepts.
Still, banks are approaching automation in lending in a variety of ways. "We're working toward STP," relates Ron Klatt, SVP of Jefferson City, Mo.-based Central Mortgage Company/Central Bancompany ($8 billion in assets). "We're trying to provide as many [electronic] interfaces with customers and vendors as we can. We're using e-statements wherever possible, and we offer online applications."
Klatt says a large part of the process involves eliminating redundant processing and rekeying of information by providing as much connectivity among systems as possible. He explains that Central Mortgage's Web site, which is run by MortgageBot (Mequon, Wis.), interfaces with the lender's Harland (Lake Mary, Fla.) loan origination system. The Harland system then interfaces with the servicing system. Central Mortgage images a portion of its loan files and plans to invest more in this kind of technology in the near future, Klatt adds.
To further simplify things, the lender consolidated its mortgage and home equity products onto one platform -- Fiserv's (Brookfield, Wis.) MortgageServ system. "This has allowed us more flexibility in offering new products, and we can service these loans on the same platform," Klatt says. "This makes it easier to train staff and leads to a better experience for the customer."
However, the key to efficiency, Klatt continues, is giving customers ready access to their information, which is why the online channel is so important to the lending process. "More people are going online to obtain information, so privacy becomes a huge issue here," Klatt says. "But if your security is good, using the Internet [for lending applications] can be safer than using U.S. mail." Klatt notes that Central Mortgage uses dual authentication and extensively trains its personnel on security issues, in addition to educating customers.
Cleveland-based National City ($138.6 billion in assets) also is on the road to loan automation. According to Lakhbir Lamba, EVP of consumer and business lending, last year the bank implemented a central fulfillment system in which all fulfillment of consumer loans is done without paper. "We integrated with valuation, flood and title companies," he explains. "We use a simple GUI [graphical user interface], imaging technology and workflow engines to achieve this. The workflow and imaging pieces helped us move a lot of the paper out of the process." The solutions are mostly vendor-based, Lamba indicates, though he declines to name the specific technology providers.
The next step will be beefing up National City's decisioning process. "This involves a lot of business intelligence and automation enterprisewide," Lamba says. "The current engine we use just doesn't have the flexibility we need going forward, so this will be our focus over the next two years."
Imaging technology also has proven useful to Brown Deer, Wis.-based Guaranty Bank's ($2 billion in assets) automation efforts, according to Steve Petersen, the bank's VP of loan servicing. However, like Central Mortgage, Guaranty also sought to consolidate its consumer lending platforms on Fiserv's MortgageServ. "The bank wanted to leverage multiple business units to meet consumers' needs," Petersen comments. "We saw that we could provide them with a more diverse product line by consolidating some systems. MortgageServ helped us do this. We want to consolidate our back-office functions and build economies of scale with efficiencies."
The bank won't go live with the consolidated system until the fall, Petersen notes. But it already has conducted a successful trial migration of consumers to the platform for lending support and services, he adds.
But Is STP Truly Attainable?
"The industry has really made some significant moves in the right direction [on STP] over the last 10 years," Petersen continues. "But I think due to specialized lending products that we'll see a variation on the old 80/20 rule: 80 percent of the lending industry will become automated, but there will always be that 20 percent of loans with special needs where you can't quite automate everything."
"There really isn't a fully automated STP lending process available," asserts MOW's Dresner. "Only parts of the process can be automated. There's collateral involved, and you need documents like title information for automobile loans. Add to that all the compliance and truth-in-lending disclosures that need to be defined and there will always be dropout points where you need a physical document or signature."
Clark Abrahams, director of fair banking compliance with Cary, N.C.-based SAS, agrees that true lending STP is just out of the industry's reach. "The core elements are there, but I'm not aware of anyone having everything integrated," he says. "It's more like you're going from one gate to another." Besides, Abrahams contends, "I don't think pounding the STP nail will lead to significant improvements. There's so much money on the ground in the data that lenders already have. But you can only reduce so many full-time employees and reduce pieces of the process here and there."
Still, some bank executives, including National City's Lamba, are not so quick to dismiss STP in lending. "The challenge is integrating all the systems," he says. "There's no clarity around the integration of the various systems. A lot of the lending products created over time used different origination front ends and servicing back ends and different collections shops. They're not tied together. But as the industry moves toward a customer-driven approach to lending, integrating all these systems becomes an issue. You have to think about this end to end."
As banks begin to do so, they are changing their investment focus in lending systems. Previously, most lending technology investments were made on the front end, according to Accenture's Landis.
Today, the front- and back-end systems are more tightly integrated than they had been, and banks are starting to look at investing more in the back office. "In the back office, it used to be about doing what you needed to get volume through," Landis says. "Now lenders want to streamline things and are investing [in the back office]."
Vince Rogusky, CEO of Wayne, Pa.-based Epitome Systems, which specializes in enterprise productivity software, also sees a growing interest in back-office operations and processing among banks. "The back-office is a consolidation of all the lenders' information," Rogusky explains. "It's the biggest value to the bank, the place where all its information comes together from the front end. This is a place where you can drive real value to the bank and to customers. It's like a hidden gem."
According to SAS' Abrahams, data will be the key to a lender's success in creating efficiencies in the lending process. He believes that the information lenders possess can be transformed into intelligence that they can exploit to grow their business. However, doing so on an enterprise level is never easy given all the silos involved.
"You need an integrated data store before you can optimize and innovate," Abrahams states. Once this is accomplished, however, there is "a great deal lenders can do with data mining early in the loan application process. You will have plenty of time to determine the opportunities related to that loan before it closes. You can understand in advance the risk position of the loan. You can apply analytics to help you decide which loans to sell off or which ones to price more aggressively or less aggressively."
Lending as a Platform for Cross-Selling
Lenders can use such information not only to gain new customers, but also to retain and grow the relationships they have with existing customers. In fact, cross-selling off the lending relationship is growing attractive to banks as a way to boost revenue.
"Retaining customers and doing well at cross-selling seem to be the biggest challenges for lenders today," states Lisa Nelson, VP for scoring solutions with Minneapolis-based Fair Isaac. "Lenders are working to find new customer segments to pursue to build their client base. Growth is becoming more challenging as the market becomes well-served. So lenders have to differentiate and target the right customer segments."
Most important to the process of cross-selling is understanding the relationship with the customer and finding logical product pairings to present to the customer, says Mike Poulos, head of MOW's North American retail and business banking practice. "Every product pairing is different. If you're selling a home equity loan to someone who was also a first mortgage customer, that's a powerful thing because you already have the information on that customer," Poulos explains. "If you're selling a deposit account to a loan customer who's out of your footprint, that's not likely to happen. At a minimum, you need to know the relationship you have with the customer and have that information available at the point of sale."
Again, however, efforts here are often hampered by bank system silos, Poulos notes. "It isn't always the case where all the systems are talking to each other."
Doug Dolton, global CEO with person-to-person online lending network Zopa (London), acknowledges that banks can deliver on service, but that the jury is still out on cross-selling. "Getting real cross-selling to work is a challenge because you need to get disparate groups and systems to work together. It's a catch 22 for banks -- if you're big enough to cross-sell, it's not easy to do."
However, some banks are finding success in cross-selling on the lending side. Central Mortgage jumps on cross-selling opportunities at the time a loan application is taken, according to the company's Klatt. "We work very hard to cross-sell. We get a lot of information on the borrower at the time we take the loan application. We can sell them checking, savings, CDs, credit cards," he relates. "A key reason we're in the mortgage business is to cross-sell." Klatt notes that this ties in with the lender's single statement policy, in which customers can view all their accounts in one place.
National City's cross-selling efforts in the lending area are centered on a program that ties together rewards for all its products -- cards, checking and HELOCs, explains the bank's Lamba. "We've been doing this for more than a year, and it's doing very well," he says. "It makes the customer feel rewarded, and it makes it easier for them to do business with us."
Of course, success is not without its obstacles. "The pain is in the application process around enterprise data integration," Lamba says. "You don't want to ask the customer the same thing five different times."
Still, there are those who are more cautious about cross-selling. TowerGroup's Focardi notes that it's important to remember just how complex the lending application process is on its own. "A mortgage lending transaction is complex enough without having to add additional products to the mix," he says. However, if a bank takes a more focused approach to cross-selling, such as offering to consolidate customers' existing loans into one or helping them open a checking account where payments can be made directly to their mortgage every month, then the concept can work, Focardi adds. "Cross-selling can be done with selected consumers, depending on their situation. There's no one-size fits-all approach."