Benchmark your lending operation using the 6 levels of lending automation

Automation and other forms of digitisation may seem overwhelming at first glance for community financial institutions like credit unions, community banks, and lenders. The complexity lies in how to make digitisation a reality in a traditional organisation without any external standards to measure how well you are performing. 

One approach is to develop a thesis of what your industry will look like five to seven years from now and start building products and services today for that future. Another approach is to look at how other industries are approaching digitisation. One example is the automotive world, where automated driving has well-established steps that can be adapted to guide thinking around what to do in a financial organisation.

Self-driving cars manufactured by companies like Tesla, Mercedes, Toyota, and Honda are categorised into six levels, based on standards developed by SAE International. Each of these levels indicates a particular level of automation, from which analogies can be drawn to the banking and lending industry. 

In this industry paper, we define the six-levels of automation for  the banking and lending industry, starting with no automation at Level 0 and rising to end-to-end process and credit automation at Level 5.

Benchmark your lending operation using the 6 levels of lending automation

Automation and other forms of digitisation may seem overwhelming at first glance for community financial institutions like credit unions, community banks, and lenders. The complexity lies in how to make digitisation a reality in a traditional organisation without any external standards to measure how well you are performing.

One approach is to develop a thesis of what your industry will look like five to seven years from now and start building products and services today for that future. Another approach is to look at how other industries are approaching digitisation. One example is the automotive world, where automated driving has well-established steps that can be adapted to guide thinking around what to do in a financial organisation.

Self-driving cars manufactured by companies like Tesla, Mercedes, Toyota, and Honda are categorised into six levels, based on standards developed by SAE International. Each of these levels indicates a particular level of automation, from which analogies can be drawn to the banking and lending industry.

In this industry paper, we define the six-levels of automation for  the banking and lending industry, starting with no automation at Level 0 and rising to end-to-end process and credit automation at Level 5.

6 levels of lending automation

Level zero

No digital lending or automation capabilities

This level of loan automation is analogous to a traditional motor car being driven by a licensed driver. The vehicle features warn the driver but do not interfere with the vehicle’s operation. The driver has to steer, brake and accelerate. The vehicle warns the driver through functions such as forward-collision warnings and lane-departure warnings.

 

Similarly, at Level 0 lending automation, IT systems are in place for loan management or core banking, but no technology platform is in place for digital lending or lending process automation. Lending is an entirely manual process for information gathering and assessment.

 

The loan officer processes and the underwriter decides whether to grant a loan. The person in-charge takes responsibility for processing the loan application and must review the information, work across multiple systems, bring data together and communicate with the applicant. 

 

The loan officer is the driving force behind the loan process, reviewing and following up with the applicant manually. In other words, all five of the Cs of Credit – character, capacity, capital, collateral and conditions – are assessed manually. 

Level ONE

Digital loan application capabilities for borrowers, no automation for lender

In the driving world, this is a level where the vehicle itself isn’t automated but can take some responsibilities over from the driver. When engaged, the system can either steer the vehicle, or manage acceleration and braking on behalf of the driver, but not both. Two examples here are adaptive cruise control and lane-keeping assistance where the vehicle rights itself as it senses that the vehicle is about to depart a lane.

At Level 1 of loan automation, there are borrower/end user self-serve capabilities, such as online loan application and consent, digital onboarding, Know Your Customer (KYC) and anti-money-laundering (AML) requirements, as well as uploading of supporting documentation. However, there is no automation of back office processes, and no end-to-end integration of systems. Humans still process and assess all applications.

The loan officer remains responsible for driving the loan process, reviewing, and following up with the applicant manually. Gathering information about one or two of the five Cs of Credit can be automated at this level – parts of the process are automated but the decision making still rests with humans and is not automated. 

Level TWO

End-to-end digital capabilities for borrowers, process automation for lender

Systems that can both steer and accelerate/brake a vehicle, while the driver remains fully responsible for driving the vehicle, fall into this category. Examples are highway pilot functionality, which can take responsibility for speed control, lane-keeping, and lane exiting and entering.

 

In the lending scenario, the lending team uses a digital platform for loan management. Evidence gathering and validation, documentation processing, and interpretation are all automated. For borrowers, at this level, issuing has been digitised, with digital signatures for documents and online payments for loan drawdown. However, loan assessment is still done by a human. 





At Level 2 of loan automation, the gathering of information around four or five of the five Cs of Credit can be automated, but lending decisions are still made by a human. The borrower’s user experience is digitised at this stage, however the lending team is busy filling gaps in the system and processes in the background.



Level three

End-to-end digital capabilities for borrowers, process automation and decision support for lender

At this level of conditional automation, the system processes, but the driver makes the final decision. The system actively takes control of the process, but the driver is available to take over – it is a self-driving car with manual override. At present, no vehicles that have this capability are available to the general public. 

At Level 3 of loan automation, there is process automation for both borrowers and lenders through the use of an integrated digital platform. The platform now also provides underwriting and decision support such as a full underwriting assessment report generated by the system, but humans still make final decisions. Some banks are already using systems at this level of automation to handle gathering data from the applicant, completing the loan application forms, and gathering documentation.  

Automated loan systems can also fulfil KYC and AML requirements, client onboarding, and documentation validation. These systems automatically extract data from documents or gather data from third-party systems, and hence all the data required for an application is automatically gathered, processed and validated. 

In other words, information about all five the Cs of Credit can be gathered by such systems, but credit decisions are made manually. The loan officer still performs final checks and reviews and makes the ultimate decision, but their time isn’t allocated to administrative tasks. Rather, their expertise is applied at the decision-making level only, allowing them to be more productive. 



Level four

End-to-end digital capabilities for borrowers, process automation and automated assessment and decisions, with human intervention

In the vehicle world, at this level of automation, the system is fully responsible for driving tasks within limited service areas, such as automated tourist buses on a set route around a city some futurists have envisioned. Occupants are passengers only and do not need to be involved with any driving whatsoever.

 

A banking system at this level of automation entails fully automated processing of applications, credit decisions, and issuing for specific types of credit applications. However, human intervention is always needed to complete the end-to-end process, for example full end-to-end processing of mortgage applications. 

 

At this Level 4 of loan automation, all five Cs of Credit are both researched and decided upon by the system. However, more complex products would still be driven by a loan officer. Not only the process but also the credit decision is automated to a large degree. 

Level five

End-to-end digital capabilities for borrowers, process automation and automated assessment and decisions, with no human intervention

This is the level at which Knight Rider’s KITT (and KITT’s evil twin, KARR) functioned. The vehicle is fully automated, processes data, and makes decisions without any human intervention.

At Level 5 of loan automation, the system itself not only gathers, processes, and validates information and data, but also makes decisions, even about complex loan products. The system learns as it goes as Artificial Intelligence does, so its decision-making constantly improves. The system is, therefore, able to assess the applicant’s credit history, debt-to-income ratio, disposable income, assets to serve as collateral, the purpose of the loan, the interest rate, and the loan amount in order to come to a decision guided by rules built into the system.

In short, Level 5  is the Holy Grail of loan automation. It includes the fully automated processing of applications, credit decisions, and issuing for all credit applications. No human intervention is needed in any part of the process e.g. personal loans or SME loans.

conclusion

Automation is critical because it enables local financial institutions to:

  • Reduce costs
  • Efficiently grow revenue
  • Improve customer service with faster decisions
  • Reduce risk with better quality data and consistent processes, and
  • Promote financial inclusion and equality because vital lower-value loans become profitable.

The lending sector is one of the most important aspects of the community banking industry, and they heavily benefit from implementing innovations such as digitization and automation. Because this sector provides essential services to customers by providing loans and other financial services, it has become increasingly difficult for lenders to keep up with its pace of growth. This has led to an increased demand for automation to maintain efficiency. 

 

The main goal of any digitisation project is to stay relevant and competitive by improving customer experience in a world that has become predominantly digitised and where anything and everything can be done online. This inevitably leads to fundamental changes in how financial institutions operate and deliver value to their customers. Only if an establishment can upgrade itself will it be able to cater to the needs of the new-age clients, stay ahead of the competition, and be prepared for changes in the economic environment.

 

The reality is that very few community financial institutions will have the necessary technical skills in-house to make the required changes alone. This is where a partnership with a digital banking expert who has experience in automating banking processes, specifically loan processes, can be of huge assistance. Automation might be challenging, but there is no reason to be a “lone crusader in a dangerous world”, ala Michael Knight. An expert partner can help you navigate change, step by step, and prepare you for future challenges. 

conclusion

Automation is critical because it enables local financial institutions to:

  • Reduce costs
  • Efficiently grow revenue
  • Improve customer service with faster decisions
  • Reduce risk with better quality data and consistent processes, and
  • Promote financial inclusion and equality because vital lower-value loans become profitable.

The lending sector is one of the most important aspects of the community banking industry, and they heavily benefit from implementing innovations such as digitization and automation. Because this sector provides essential services to customers by providing loans and other financial services, it has become increasingly difficult for lenders to keep up with its pace of growth. This has led to an increased demand for automation to maintain efficiency. 

 

The main goal of any digitisation project is to stay relevant and competitive by improving customer experience in a world that has become predominantly digitised and where anything and everything can be done online. This inevitably leads to fundamental changes in how financial institutions operate and deliver value to their customers. Only if an establishment can upgrade itself will it be able to cater to the needs of the new-age clients, stay ahead of the competition, and be prepared for changes in the economic environment.

The reality is that very few community financial institutions will have the necessary technical skills in-house to make the required changes alone. This is where a partnership with a digital banking expert who has experience in automating banking processes, specifically loan processes, can be of huge assistance. Automation might be challenging, but there is no reason to be a “lone crusader in a dangerous world”, ala Michael Knight. An expert partner can help you navigate change, step by step, and prepare you for future challenges.