Digital Transformation in Credit Administration

By Jeffrey R. Schmidt
| 7/30/2018
July BPI

Commercial lenders are under consistent pressure to support the growth of their organizations without adding administrative resources. At the same time, credit administration teams also must adapt to a continuing succession of new technologies that are reshaping how the financial services industry performs many of its most basic processes.

The convergence of these two trends – that is, the need to do more with less and the drive to embrace new technology – can produce significant benefits to banks and other commercial lenders. By embracing the change opportunities created by these new tools, forward-thinking organizations can work toward achieving a digital transformation – helping them do their work faster and more cost-effectively, while adding genuine value to their organizations and their customers alike. 

Today’s credit administration landscape: digital technology’s growing impact

The duties of the credit administration function vary from one organization to the next, with the degree of centralization playing a major role in determining how roles and responsibilities are assigned. Centralization – or the lack of it – becomes an increasingly important consideration as organizations grow. Regardless of the specific variations in their duties, however, the tasks required of most credit administration departments can be organized into several broad functions, including:
  • Obtaining current financial information such as borrower financial statements, collateral appraisals, references, and other supporting data
  • Coordinating credit analyses and risk rating to enable more effective credit decision-making
  • Maintaining credit files, including updated appraisals, loan covenant tracking, and reporting
  • Preparing documents and communications involving both customer interactions and regulatory reporting
  • Performing portfolio analysis to support portfoliowide risk management for both strategic and compliance purposes
  • Supporting the relationship managers in order to support growth strategies and improve portfolio quality

In carrying out these functions, credit administration personnel can encounter a variety of challenges, including changing regulatory requirements, changing management expectations, and ongoing technological evolution such as multiple system updates. Of all the various hurdles they must overcome, data-related challenges often prove to be the most difficult issues. 

For example, in one recent Crowe webinar, participants were asked to identify the challenges that are causing the biggest issues in their credit administration functions. All of the top three responses were related to various aspects of data acquisition and management, including timely acquisition of financial information, tracking and visibility of financial data, and identifying data that reveals actionable exceptions. 


Leading Credit Administration Challenges

While the survey responses indicate significant data-related challenges, the survey also could be viewed as encouraging news. Unlike the customer service or staffing issues that many survey respondents cited, the data-related issues that led their concerns are also the very challenges that can be most directly addressed through some of today’s digital technology tools. 

Digital transformation: recent and current trends

The rapid pace of technological change can make it difficult to stay abreast of trends. As new buzzwords appear almost daily, they tend to make it harder– rather than easier – to understand the state of technology. Of the many “hot topics” in banking technology, several deserve particular attention because of their potential to transform the credit administration function. These include:
  • Cloud technology. By removing barriers between organizations, customers, vendors, and even competitors, cloud data storage helps simplify data sharing while providing simplified access to add-on services and applications. In addition to speed and more widespread access, the results can include cost savings and security advantages
  • Robotic process automation. At first glance, using robotic process automation to perform manual or repetitive tasks might seem like a transformative change, but in fact it is more evolutionary than revolutionary. Ultimately, the same tasks still are being performed, but the use of automation allows them to be done more quickly and accurately, while freeing up human capacity for more productive tasks
  • Artificial intelligence (AI). By transferring the responsibility for certain decisions and removing emotion from the decision-making process, AI – and machine learning in particular – offers the potential to significantly advance the efficiency and consistency of lender decision-making. Data access and data quality are particularly critical in implementing this technology
  • Blockchain technology. Like a giant ledger in the cloud, blockchain technology offers a new way of recording transactions in that it is self-validating and verifiable. While its initial applications have been focused in retail and alternative currency transactions, blockchain technology also offers the promise of speeding up many commercial lending processes by enabling faster valuations, real-time collateral validation, and immediately verifiable title transfers, to cite only a few examples
  • Mobile technology. In addition to numerous applications in retail transactions, mobile technology is generating significant changes in the ways that lending organizations perform their day-to-day work and interact with customers. Internally, mobile technology also contributes to the continued acceleration and compression of decision cycles, while also helping to enable greater productivity and improve the work-life balance of employees
When employed to their full advantage, digital tools such as these can do much more than merely help organizations do the same things faster. Ideally, they also can be used to do something new – and in the process create a true value exchange that benefits all parties concerned. In this sense, today’s digital transformation involves technology and incorporates strategic considerations.

Digital transformation: practical examples

In many instances, the practical and process-oriented benefits that technology can deliver to banks or other financial services organizations can be obvious. However, digital transformation is not only about performing the same task faster or better. Instead, it involves accomplishing a mission in new ways, enabled by digital technologies. Efficiency improvements are evolutionary, not transformative. Transforming creates the potential for a value exchange in which both the lender and its customers receive a genuine benefit from the application of technology. Today’s best-in-class lenders actively look for such opportunities and will adapt or upgrade their technology solutions to help deliver them.

For example, one very effective tool for helping to improve customer compliance with documentation and reporting requirements is a web-based customer data portal. Customers access such portals online and submit needed documentation directly, in many cases allowing the extraction of data from these regularly submitted financial statements. 

Automating the submission of customer data in this way greatly reduces the effort required from customers and improves compliance. This benefits the bank by reducing the volume of reminders and follow-up activities that must be performed by the credit administration staff. The same system also can be used to extract and feed borrower data directly into lenders’ spreading systems, thus freeing up credit analysts to focus on actual analysis rather than data acquisition, follow-up, and verification.

In addition, however, a customer data portal also can be used to create added value for the customer. Lenders can use the same secured access point to feed back relevant industry and peer data to their customers, who then can use this information for their own comparative analysis and strategic planning purposes. 

Another example of how technology can create added value for customers and banks alike involves the automation of credit analysis and anomaly detection activities. In addition to helping improve analyst efficiency and accuracy, the technology used to automate these processes can feed back useful information to customers. The advanced credit analysis tools used by lenders also can be applied to give borrowers access to new data sources such as social data, which otherwise might not be available to them. These data sets can be combined with other external indicators to create predictive models that customers can use to improve their own risk management and strategic planning capabilities.

In addition to further efficiency gains through additional advances in robotics and machine learning, other enhancements are likely to include further integration into internet marketplaces for real-time valuation, as well as connectivity to blockchain transactions and internet-enabled asset (for instance, collateral) tracking tools. 

Next steps: embracing the digital transformation

The online survey responses that were explored earlier reinforce how critical it has become for lenders to have fast, consistent access to accurate, reliable, real-time data. Improving both data quality and data capture is an essential first step in addressing the competitive, cost, and risk management pressures that today’s credit administration functions face.

In reassessing, cleaning, and fixing an organization’s data systems, it is important to make sure that data is captured in useable formats. Decision outcomes and rationale should be entered as data due to their importance in teaching machine learning models. The frequency of data collection, which likely is currently limited due to the effort it takes to enter the information into systems, should be re-examined in light of the available automation technologies. More data will equal more insights and more intelligent support systems.

Credit administrators also are advised to reassess their roles and interactions with the lending relationship managers who cultivate frontline exposure to customers. Managers should be encouraged to enhance these internal relationships proactively, asking relationship managers what type of information they need to achieve better insights into customer needs, along with what types of information could benefit borrowers as well.

Credit administrators should take a proactive approach to the ongoing digital transformation, rather than merely reacting to new technology tools as they become available. By doing so, today’s most advanced credit administration functions are finding they can use technology more effectively to create opportunities for genuine value exchange that can benefit all parties in the transaction, while maintaining regulatory compliance and effective risk management practices at the same time.

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Jeff Schmidt
Jeff Schmidt