Digital Transformation in Banking: Benefits & Impact

Recent banking trends indicate a shift in the role of technology in transforming the banking ecosystem. Whether financial institutions adopt digital technologies to streamline back-end processes or front-end customer-facing ones, these technologies drive today’s banking innovation.

For most financial institutions (like banks and credit unions), digital transformation in banking means they can offer more appealing solutions that achieve loan automation. The most notable of these trends include financial institutions’ investment in mobile-first financial services, process automation via artificial intelligence (AI), and the optimization of decision-making using advanced analytics tools.

Undoubtedly, digital technologies are transforming the value and range of loan products that can be offered to customers. This guide takes a deeper dive into how financial institutions are embracing digital transformation.

The Need for Digital Transformation in Banking

Why should banks, credit unions, and other financial institutions take advantage of digital transformation? By adopting digital technologies, these institutions can improve their operational efficiency, boost productivity, compete favorably in a fast-changing lending ecosystem, and, ultimately, increase their revenues.

In the lending industry as well as the broader banking ecosystem, digital transformation is driven by a few key factors.

Changing Customer Expectations

Today, borrowers have on-demand access to digital technologies on their smartphones and other mobile devices, meaning they want to be able to apply for loan products using these devices from anywhere and at any time—without traveling to a branch to complete an application.  

Mobile banking also simplifies transactions, ranging from making payments to depositing checks to applying for credit. With such flexibility and ease of use, consumers can complete digital financial transactions faster, more efficiently, and hassle-free.

Increasing Competition from Fintech Startups

Competing in the lending market with more innovative fintech startups means banks and credit unions must adopt tech-friendlier strategies to appeal to and retain tech-savvy customers.

Additionally, the legacy systems most traditional lenders use cannot compete with the innovation behind digital technologies used by fintechs to automate loan origination or conduct fast, AI-driven data analytics to anticipate borrowers’ needs.

Advantages of Embracing Digital Transformation for Banks and Lenders

The tangible benefits of digital transformation in banking are evident across the industry. A Cornerstone Advisors survey of community-based financial institutions indicates that 42% of these institutions realized an improvement of 5% or more in the number of accounts opened, whereas 33% achieved loan productivity by the same margin.

Although productivity was observed the most in the above areas, Cornerstone Advisors notes that financial institutions pursuing digital transformation also achieved increases in:

• Customer retention
• Loan and deposit account registration
• Product sales per customer
• Revenue generated from payments

Key Components of Digital Transformation in Banking

What does digital transformation in banking look like in practice? Lenders should consider the following five components to transform and modernize their workflow.

#1 Technology Infrastructure and Upgrades

With traditional loan origination, lenders like banks and credit unions typically use manual workflows to process, review, and underwrite applications before approving loans or setting prices. Since they are human-driven, these workflows are intrinsically slower, require significant human resources, and often limit operational efficiency.

That is where technology infrastructure and upgrades come in for financial institutions keen on digitally transforming their lending processes. Deploying automated tools can help connect back-end loan origination systems to their customer-facing counterparts to speed up data collection and swiftly process credit data.

Likewise, upgrading legacy systems connects the typically disparate components of a lender’s infrastructure so that loan officers or underwriters can easily see historical consumer data to help make decisions on loan applications.

#2 Implementing Advanced Loan Origination Systems

Traditional loan origination systems (LOS) and legacy systems are often slow because of bottlenecks from:

• Reviewing loan applications and the supporting documentation customers provide
• Conducting credit checks to determine the risk of lending to borrowers
• Meeting the requirements of regulatory and compliance frameworks

Advanced LOS solutions streamline these processes by anticipating and accounting for the risks lenders face in advance. Then, lenders can set customized rulesets to guide the system, acting as an around-the-clock team member that never misses a detail. With this advanced technology, lenders can improve workflow and visibility at every stage of loan origination.

#3 Leveraging Big Data and Analytics

With a crowded lending market, surpassing other financial institutions that offer similar loan products comes down to making decisions faster and tailoring loan solutions to specific consumer profiles.

However, it is challenging to customize loan solutions to consumers without collecting and interpreting the right data. And even after obtaining vast amounts of data from consumers, it is cumbersome to analyze it and generate actionable insights without the right analytics tools.

Automating data processing and analytics tools help lenders gather and analyze the data they need to stay competitive in the marketplace.

#4 Enhancing Customer Experience through Digital Channels

The fast-changing consumer profile in today’s banking ecosystem demands a user-friendly experience, which typically involves offering loan solutions to customers via more accessible digital channels, such as websites or mobile apps.

The banking era from the last few decades required consumers to apply for loans by completing paper-based applications at brick-and-mortar locations; digital transformation enables lenders to offer the same application virtually anywhere via digital tools.

#5 Emphasizing Cybersecurity Measures

Implementing robust cybersecurity measures helps financial institutions safeguard the vast amounts of consumer data they process during loan origination.

Banking data is at high risk for cybercrime threats, meaning banks and credit unions must proactively mitigate these threats or remain prepared to defend their institutions if high-impact risks to customers’ data are detected. An advanced LOS and other digital solutions can provide extra cybersecurity measures to keep lenders’ and borrowers’ information secure.

The Impact of Digital Transformation in Banking

With all of this in mind, it should not come as a surprise that digital transformation can offer a myriad of benefits.

• Streamlined loan origination process – Whether it is automated collection of data from loan applications, fast decision-making on them, or accurate risk-scoring and pricing of loan products, digital applications simplify loan origination from start to finish.

• Faster loan approvals and disbursements – With traditional loan origination workflows, decision-making on loan applications is delayed by manual processes. However, automating and streamlining these processes increases the application processing rate, increasing the speed of approvals or denials. When applications are approved quickly, lenders can disburse financing to their customers faster.

• Improved risk management – Adopting new technology enables lenders to manage the risk of lending to hundreds or thousands of customers more effectively. By speeding up the analysis of customers’ data, lenders can better understand the unique lending risks in each application so they can make the right decisions on them.

• Enhanced customer engagement and retention – Digital technologies lower the barrier to physical (often in-person) loan applications, enabling banks and credit unions to reach more customers. Additionally, the speed of loan origination and the ease of use of these technologies increase the chances of lenders retaining repeat customers who enjoyed their initial loan origination experience. That’s why an advanced loan origination software for banks and credit unions is the best digital solution to scale a business.

• Boosting operational efficiency and cost savings – Through automation, digital tools speed up cumbersome manual processes like data collection, curation, processing, and compliance, redeeming the time it typically takes teams to complete them internally—and improving a financial institution’s efficiency and reducing operational costs.

Choosing the Right Loan Origination System for Digital Transformation

How can lenders choose the right loan origination system to support their digital transformation plans and achieve optimal lending efficiency?

Factors to Consider When Selecting an Advanced Loan Origination System

Broadly speaking, lenders should find an advanced LOS that will best meet their needs and those of their customers in the short and long term. Investing in the right LOS comes down to a few factors.

Common features of an industry-leading LOS include:

• Automated rule editing – For lending institutions to make quick decisions on loan applications, they need a set of flexible risk profiling and pricing financial rules that will customize decision-making to each applicant’s specific profile, increasing the overall accuracy and optimization of lending.
• Scalability – Lenders planning to expand their loan portfolios require LOS solutions that grow with their institutions’ plans, meaning the LOS should scale up easily, whether a lender grows to take on hundreds, thousands or millions of loan applications at a time.
• Tracking system – An LOS should help a lender manage customers’ data and the supporting documents they submit during the loan origination process. These documents include anything from credit reports to financial statements and verification documentation.

Fuse: An Industry-Leading Loan Origination System

Fuse’s LOS software is built for the digital transformation era and beyond. Lenders can integrate new partners faster, avoiding the hassle of a complex technical pipeline. With no prior tech experience required to customize the software, financial institutions and their loan processing teams are in complete control of driving more efficiency.

Fuse is also flexible, secure, and scalable, meaning lenders can compete favorably in the lending market and scale up their operations—all without worrying about common security risks. Fuse’s software is SOC 2 Type 1 and 2-compliant, providing lenders with peace of mind when they handle sensitive customer data.

Whether you are a credit union looking to achieve a modernized lending workflow with a streamlined loan origination process or a bank interested in scaling up and diversifying your loan offerings, Fuse can help.

Learn more about Fuse by requesting a demo today.

Sources:

Cornerstone Advisors. What’s Going On in Banking? https://166442.fs1.hubspotusercontent-na1.net/hubfs/166442/2023R3_Whats-Going-On-In-Banking_Cornerstone-Advisors.pdf