Bankers have been talking about achieving straight-through processing (STP) for years. The concept of being able to cut through all the paper and complete a transaction electronically from start to finish obviously has its appeal. One area in particular that lends itself to STP is, well, lending.
With some of the technologies introduced in the past decade, lenders have made respectable progress toward reaching STP. Banks finally have been able to start automating and streamlining their loan processes to the point where, one day perhaps, there will be virtually no paper or human intervention.
David King, SVP, business technology, with Dallas-based First Horizon Home Loan (a subsidiary of First Horizon National Corp., $37 billion in assets), believes "tremendous strides" have been made in the lending industry around STP. "There's greater pressure to turn deals more quickly," he explains. "Competitive pressure has squeezed that duration so much. Technology has been thrown at this issue and is helping along STP [efforts]." But while he is optimistic about the industry's progress toward automation in lending, King concedes that there still is a way to go.
"Great strides have been made in this space," agrees Madhavi Mantha, a senior analyst with Celent (Boston). "Lenders are trying to capture as many documents digitally as early on in the process as possible in order to reach STP." Mantha says lenders recognize that open technology with strong integration capabilities is necessary to capture papers electronically, and as a result, she is seeing more and more banks replace aging loan origination systems. "In general, more technology is available to the industry," she says. On top of that, Mantha adds, the state of the lending market and deposits today also are nudging along STP efforts. "The days of heavy deposits are over. There's an impetus [among banks] to get their fixed cost base down in order to bring per-loan costs under control," she relates
One Step at a Time
Not surprisingly, however, banks are cautious when it comes to revamping their lending systems and processes, say experts. As John Gordon, president of the leveraged product development group with core processing solutions provider Fidelity National Information Services (Jacksonville, Fla.), says, banks are taking "a dip-your-toe-in-the-water and walk-before-you-run approach" to STP in lending. As a result, many streamlining efforts are being carried out on a piecemeal basis rather than over the entire loan system.
"STP is being done today," states John O'Connor, practice manager, commercial lending, with Benchmark Consulting (Atlanta). "If you look at the history of lending over the last 30 or 40 years, you've seen us become very efficient with credit cards, where it costs a fraction of pennies per transaction. Home lending has gotten more efficient with imaging and scoring technology. And more recently, we're seeing this in the small-business lending space, too. Some organizations have gotten pieces of this together and are trying to complete the entire process."
Despite this progress, there still are areas in lending that require more manual intervention because of their complexity, such as commercial lending, for which there is more information to track, capture and hold. Consumer lending in general is easier to automate because the information load is not as great, O'Connor says. In addition, he notes, some banks are more willing to automate the lending process on the retail side, and thus commoditize retail lending to some degree, because there is more at stake in terms of relationships and money with their commercial businesses.
Like many banks, Birmingham, Ala.-based Compass Bank ($33.6 billion in assets) is finding that along its STP journey, some processes are easier to automate than others. According to Lee Weinman, SVP of investment operations with the bank, there are numerous areas on the front end of the lending process that can be automated and streamlined, such as imaging of documents, document management and data management, including passing information to the appropriate decision level. However, "You still have to get the customer to sign a document," he notes. "Also, once you get to the dispersal process, that's where things start to slow down because you're dealing with legal documents that require paper and signatures." And finally, things come to a crawl when servicing the loan, Weinman says.
Celent's Mantha affirms that most of the focus in streamlining loan systems has been on front-end processes; closing a loan, however, typically creates a bottleneck. "In the closing part, that's where third parties get involved for title issuing and verification of liens," she explains. "The secondary market -- those who invest in the loans -- has different criteria. That's where a lack of standards leads to more complication. At origination, the lender has more control over the loan."
'Three Pillars' of STP
The emergence of three main pieces of technology -- workflow tools, automated underwriting/rules engines and imaging solutions -- is helping to expand STP capabilities beyond the front end, however. "These are the three pillars of getting to STP in lending," says First Horizon's King. But, "In any automated environment there might be some loose threads that aren't being taken into account. So you also need the necessary safeguards, like fraud-detection technology."
For Pittsburgh-based PNC Consumer Services ($94.9 billion in assets), these technologies have enabled the bank to extend automation to both the front and back ends of the lending process. "We've invested in decision rules engines that are attached to each loan," explains Jim DeFoggia, president, PNC Consumer Services. "They're assigned a behavioral score to help make decisions on how to service the loan. We're leveraging imaging technology, too. There will always be a certain amount of paper but it's a matter of how efficiently you handle the data when it comes to you."
Benchmark's O'Connor says decisioning/business intelligence tools in particular make it easier for lenders to follow a loan over its life cycle. "The nice thing about having the credit process on a platform system is that all the data is soft," he says. "So you can more easily compare what the customer looks like over time." Ultimately, O'Connor adds, banks can use this information in aggregate to create profiles of particular kinds of customer segments so they can better determine whether to lend to such people in the future. "Much of this is still very paper based for some organizations," he observes. "But others have become electronic."
Still, no matter how much automation technology the industry adopts, it is important for lenders to keep in mind that "there will always be a piece where they have to go to customers and collect a document," asserts Piyush Tantia, a director with New York-based Mercer Oliver Wyman. "You can't really automate all of this unless government agencies make documents more available electronically." Tantia is quick to note, however, that aside from the document-gathering dilemma, the lending process indeed is becoming quite automated today.
Technology and Other Challenges
Another vital element to industrywide automation is integration. "Integration is a huge step," according to Compass' Weinman. "It's a complicated effort to bring software into any institution and get it to talk to the legacy systems."
Further, "You have to link these [lending tools] to various distribution channels, vendor systems, credit bureaus and databases," explains Andrew Dresner, a director with Mercer Oliver Wyman. "All that data has to be brought together more or less in real time. Banks are starting to get rid of their clumsy legacy systems and are building these links."
Complicating the task of building links is the lack of an all-encompassing industry solution. Lenders need to realize there is no one solution out there that will solve their technology problems, according to Jeffrey Tintle, SVP, Baker Hill Client & Advisory Services (Carmel, Ind.).
"No one vendor has everything from soup to nuts that is effective," Tintle states. "Banks would prefer to deal with one vendor. So it comes down to who comes closest to an end-to-end solution. The lender might not always be getting best-of-breed technology for all things, but if there are workflow efficiencies gained, then they would tend to stay with a single vendor anyway."
Of course, in order to pick which vendors with which to work, banks first need to decide which parts of their lending systems they wish to upgrade. This is something banks sometimes fail to do well, according to Fidelity's Gordon. "You might have the infrastructure in place, but to get STP, you need to define the pieces in the process to be automated, orchestrate them together and tie them to a consistent enterprise view of the customer," he explains.
And beyond the technology, there are other factors that contribute to the success of an STP initiative. As with any technology implementation, it is vital to get staff on board, according to Baker Hill's Tintle. "If you're just talking about automation, STP in lending won't happen," he opines. "Technology is an enabler of behavior. In STP, behavior change is 75 percent of its being successful. If you just deploy software and it sits there on an employee's computer, what good is it? To me, the No. 1 obstacle to an STP implementation is changing people's behavior."
"Some lenders think one piece of technology will solve all their problems," adds Benchmark's O'Connor. "When you lead with technology, you haven't answered all the questions. What you need to do is create a policy that drives the process, then line up your people. Then you're ready for the technology. Organizations that use this approach are generally more successful."
"Banks spend millions on technology with no real value," states Fidelity's Gordon. "Policy is the way to start. Most banks are not organized to deal with STP."
Perhaps one of the most significant areas around STP lending efforts that requires people/policy changes is cross-selling. The volume of information banks gain from lending customers is a veritable gold mine -- if used correctly.
STP Supports Cross-Selling
"You have all this information on customers in front of you on the underwriter's desk, and you can take that and sell credit products, deposit accounts and cash-management products," says Benchmark's O'Connor. "Some of the intelligence built into [lending] systems can provide recommendations for groups that are more likely to buy a given product."
"There's a lot of money to be made" in cross-selling, says First Horizon's King, who adds that the bank has made a commitment to increase cross-selling efforts. "Banks realize it makes sense to grow their business within their existing customer base, rather than trying to acquire new customers. In the mortgage process itself, by the time you capture all that information, you certainly know enough about the individual to sell them a credit card or deposit account."
Of course, a commitment to cross-selling requires the support of the entire organization. The lines of business within a bank can be very possessive of their customers and may be reluctant to share information, notes Baker Hill's Tintle. "A wall that needs to be broken down [at banks] is the ownership of clients in the various lines of business," he states. "Banks don't look at [cross-selling] as doing a good job of referring business over to another department but of losing money for your own department. Executives have to set up a new reward paradigm to maintain profitability and ward off nonbanks."
Banks also may need new ways to identify fraud and protect client data in an STP environment. Fraud always has been a problem for lenders, but increased automation could result in some red flags being overlooked, says Jason Dufner, SVP, IT content and banking systems, with Detroit-based Flagstar Bank ($15.2 billion in assets). "The data could look perfect, but it still might be incorrect or misrepresented," he says. "Fraud has definitely been an obstacle to reducing the steps in the lending process."
"Regulations and data protection are always front and center in my mind," comments First Horizon's King. "We have to make the data so accessible to employees for streamlining the business, but not so much that the wrong people can get their hands on it, too."
It is vital to find some middle ground where data is both accessible to the right people and secure, Flagstar's Dufner emphasizes. "You want to be able to take that information and make it available to your officers so they can serve the customers," he says. "But there's still a strong focus to protect the customer information, too." *
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