Big Lenders Need Help With Big Data, Too

Traditional banks now realize the value in working with FinTech startups, augmenting their own service offerings by integrating the innovations of others. Lending has become one of the largest benefactors of this trend, with alternative lenders once viewed as competitors to the banks now working with them to strengthen financing options for SME borrowers.

But it’s not necessarily a new phenomenon. Baker Hill has spent decades providing loan origination services to its bank clients. And while loan origination and portfolio management has challenged lenders for years, Baker Hill Senior Director of Solutions Management Mike Horrocks tells PYMNTS why some of those challenges now have a modern twist.

Data, Horrocks noted, is today an especially poignant point of friction for financial institutions in the lending process.

“Banks struggle with the connection of loan origination data to loan portfolio management data and insights,” the executive explained. “Closing the gap of what insights were utilized in extending credit, to what insights are used to continue the utilization of credit, is critical for financial institutions today.”

Financial institutions today are also struggling to connect the dots between all of the ways they use data analytics to mitigate risk and add value to their lending operations, added Horrocks. He offered the example of banks using analysis of financial statements to assess risk in the loan origination process. But, he explained, there’s a separate group of analysts at the banks for more detailed commercial analysis, pricing and other aspects of lending.

“This disconnect of all the different teams involved in the underwriting process is not just with the physical handoffs, but it also includes the data and analytics separations as well,” he stated. Being able to streamline the data aggregation and analytics process, and being able to do so through the entire lifecycle of the loan, means both heightened customer satisfaction and a healthier portfolio, he noted.

This type of analysis has always been critical to banks in the lending process, Horrocks said. But when it comes to loan origination, modern data analytics are a whole new ball game. That’s largely due to increased regulations with requirements like stress testing, probability of default and loss given default assessments, as well as other factors, like “the impact of any given loan to the entire portfolio,” he explained.

“And as equally, if not more important, is the understanding of pricing and treatment strategies utilizing a 360-degree view of the client and related entities,” Horrocks continued. “Having access to those kind of analytics makes for a powerful differentiator as well.”

Regulatory requirements, risk mitigation, security measures and borrower satisfaction all pressure banks to grasp the power of data analytics. But the emergence of alternative lenders using their own algorithms to underwrite loans has created yet another, contemporary layer of demand for financial institutions to increase their data capabilities.

“Alternative lending solutions are utilizing convenience, speed and strong analytics to minimize risk as the key drivers in extending credit to customers today and as a key differentiator in the market,” Horrocks noted. While those capabilities of alternative finance players have led many traditional banks to partner up with them to gain those capabilities themselves, Horrocks said other third-party service providers to the banks can help them compete with the alt-fin market.

Data is vital to remaining competitive, he said. “Utilizing the power of analytics and decisioning capabilities, the speed and analytical insight drivers are addressed, leveling the field between banks and those alternative lending solutions.”

Plus, Horrocks added, banks have something alternative lenders don’t always offer: reliability.

“When you add on the trust and confidence and regulatory guidance that banks have developed in the market for years,” he said, “you now have an answer that is clearly a leading solution, versus more contemporary alternative solutions in the marketplace.”