No business wants to end up lending money to people who can’t pay it back. Aside from all the myriad of technical and legal reasons, it’s just not a good idea — from both a business and a social perspective.
What is a credit approval process?
The purpose of the process is simple in itself: to make sure that the person they’re offering credit to can afford the payments and will be able to pay the credit back on time.
Of course, while its purpose is simple, the actual steps of the process can be anything but. For many lenders, the most basic version of the process will resemble this:
- Sales order received — the customer’s request for credit, in one form or another, will be received and allocated to a staff member to process. This could be at point of sale in a retail environment, or online via a consumer account or company website.
- Credit application issued — new customers are sent a credit application form to fill in. Typically this should be a seamless process that is intuitive for the new customer. It needs to have checks and balances to evaluate not just the creditworthiness of the consumer, but also to evaluate factors such as affordability and vulnerability, which will have an impact on their ability to repay.
- Credit report — the form is reviewed, and a credit report is requested for the customer, as well as any relevant banking details and credit references. This comes from specialist credit reference agencies such as Experian, Equifax or TransUnion.
- Analysis — the credit report is then analysed and compared against the lender’s policy and terms. This lending policy will typically be represented on a ‘scorecard’ which is an automated decision system. This will use algorithms based on historical and behavioural traits, and present a score for the customer.
- Credit level assigned — depending on their credit history from the report, and the level of trust that a lender is able to place in them based on that, the customer is allocated an amount of credit they can receive.
- Credit insurance — the customer’s information is passed on to the insurer to find out if it will insure the transaction, in case they aren’t able to repay it.
- Verification — the whole application is cross-checked to make sure that the amount requested corresponds to the amount of credit the lender is willing to give. If not, the customer is contacted to make an alternative arrangement.
- Approval — forms are signed, copies are made and are distributed to all the relevant people and organisations involved.
- File details — a file for the customer is created, in which all the information gained as part of the process is kept.
This typical credit approval process may be diligent, but the amount of documents generated, the number of steps and the time taken to complete it all present problems. Particularly when each step increases the scope for mistakes to be made.
It’s often a surprise to discover that, even now, many lending companies still carry out several of the steps in their approval process manually, using paper documents.
Sending paper documents to customers incurs an extra cost. Even when these are then scanned on their return and stored electronically to transfer, it results in an extremely inefficient system.
Further delays are encountered by companies using legacy processes and software packages that don’t fully communicate with each other. This means logging into multiple systems, delaying processing times and often duplicating work.
How to improve the process
Integrating the process as much as possible, through systems like loan origination software, is important for tackling the issues caused by both manual processing and using multiple systems. These no longer need to be major IT integrations, as the new breed of lending systems are typically built as microservices that can seamlessly fit with existing processes, systems and policies without having to redefine a complete infrastructure.
Rather than disjointed steps, an integrated package such as this means going through a completely end-to-end digital process. As a result, it’s much easier to make sure that all forms are filled in correctly and all the relevant information is provided before the application can be submitted.
Lenders are able to process applications much more quickly with an integrated credit approval process making it more efficient in itself, whilst staff are freed up from the simple inputting of data to be able to concentrate on more important tasks of dealing with customers.
Businesses that can benefit
The benefits of integrating and streamlining this process aren’t just restricted to specific lenders, such as mortgage providers, credit card companies or car finance providers.
Retailers for big-ticket items have long offered credit options, but it is becoming increasingly common throughout the sector. Particularly for online retailers, the ability to offer credit can mean a reduction in cart abandonment rates.
A specific retail finance software package gives the same integration benefits of the customer credit approval process but in a specific format for retailers. This is because such arrangements are, once set up, usually only between the loan provider and the customer, and so the information gathered is slightly different to that of a direct lender.
This improvement in the credit application process can also present benefits to other businesses where credit is being extended for services, such as Telecoms and Utilities.
Whichever business you operate in, the nature of one end-to-end system means that, as well as having all information stored in one place and format, it’s possible to more accurately analyse customer trends, origins and buying habits. This provides a rich source of management information that can help shape your acquisition, onboarding and approval processes.
With all finance technology and retail management systems becoming more integrated and more flexible in their applications, it’s crucial for businesses to get their fintech in the best shape possible.