How automated underwriting benefits borrowers & lenders

Underwriting is a vital step in the lending process. It’s also known to be resource intensive and time consuming. And both sides of the equation — borrowers and lenders — wish it wasn’t so. 

But as technology develops, this dynamic is changing. Modern systems now let us partially or fully automate key steps in the underwriting process, saving an astounding amount of time and effort. 

This results in faster, fairer, and far more agreeable lending services. Better access to capital for borrowers, and higher profit margins for lenders. 

This article examines: 

• What automated underwriting is, and how it works
• The specific actions and functions you can fully automate
• Why this is so important for small business customers
• How to choose the right partners to automate your lending processes

Let’s dive in. 

What is automated underwriting?

Automated underwriting brings automation to the traditionally manual loan origination process. The document review and credit checks that once took lenders hours or days per client can now be largely automated. The result is faster, fairer lending services. 

To better understand underwriting automation, let’s look at each term separately: 

• Underwriting involves a lender checking a borrower’s credit history and financial statements to ensure that they can responsibly lend them funds. 
• Automated underwriting uses algorithms and AI instead of manual human assessment to make underwriting decisions. 

Automation makes each individual claim faster, but also lets lenders review almost unlimited claims at the same time. Whereas one human agent moves from one file to the next - perhaps dealing with a handful of prospects at once - there’s essentially no limit to the number of claims that can be automated. 

What can you automate? 

We’ve identified eight areas that you can overhaul completely, some of them customer-facing and some in the back end, thanks to AI in lending.

For underwriting specifically, there are four key steps that benefit from automation: 

• Document collection and verification. With APIs, financial data can be collected instantly. There’s no need for an agent to sit with a client and walk through each financial statement piece by piece. They submit their statements via a platform or, even better, simply connect their finance tools.
• Document and data verification. Tools can verify their authenticity in seconds, detect errors, and request more information where needed. 
• Risk assessment. Building a client’s risk portfolio is the very essence of underwriting, and takes real time and skill. Algorithms can do this job just as effectively — and more accurately — than humans, meaning risk and fraud assessments only take an instant. 
• Decision making. Based on the documents and data provided, underwriting automation can determine the right loan to propose and set out the next steps for customers. You might choose to have an agent review and approve this, but even that isn’t normally necessary. 

In other words, we can now automate the bulk of underwriting work and issue loans incredibly fast. In fact, at Defacto the entire process — from a customer’s first website visit to creating their loan — takes as little as 27 seconds.

Just as critically, you can underwrite countless loan applications at once. Customers can make a decision right away, and don’t need to wait for a counselor’s calendar to free up. 

How AI enhances the loan origination process

Artificial intelligence and automation are not synonyms — we had automation software long before AI became widespread. But by inserting AI into your automated lending systems, you amplify the already significant benefits that automation brings. 

Standard automation is designed to repeat the same process the same way every time. It’s a conveyor belt on a factory line: every cookie produced should look the same. 

You can take the same cookie-cutter approach in lending, and it’ll suit a large number of clients — particularly if your loan products are fairly standard. But every small business has its quirks, and you’re going to leave lots of potential clients behind. 

You need a way to quickly flag edge cases, unusual business models, or atypical financial documents so that a human agent can intervene. AI tools do that. But even better, machine learning systems actually learn (hence the name) from past decisions so they can make the right choice in future. Next time, you won’t need that human agent to intervene at all. 

It’s relatively early days, but AI in lending can already: 

• Detect fraudulent or erroneous documents
• Ask follow-up questions to get more information
• Make personal recommendations and guide clients to the right products
• Complete onboarding and issue loans
• Make refinancing suggestions in the future

The best lending automation systems use artificial intelligence throughout. So your agents spend less time poring over endless documents, and more building lasting relationships with customers.

• ‍Want to offer a best-in-class credit journey to customers? Learn more about Defacto Core.

Key benefits of automated underwriting

Loan underwriting has traditionally been a relatively slow and tedious process. This obviously impacts lenders, but it’s also painful for borrowers. Neither side particularly likes the status quo. 

In broad terms, the biggest issues are: 

• Time. It can take months to issue a single loan to a new customer.
• Administration. The documents and due diligence required are significant.
• Cost. Time and resources eat into profit margins, which can then price out many clients. 
• Errors. Basic human error is commonplace, whether that’s a prospect filling out a form incorrectly, or an agent accidentally adding a zero to a loan balance.  
• Oversights. Financial institutions can only back-test their scoring protocols on a tiny percentage of existing customers—less than 1%.

By definition, automation improves all of these problems—if not eliminating them altogether. Without manual human effort, loans can be issued almost instantly. And crucially, the fewer humans involved in repetitive processes, the fewer human errors you’ll see. The administrative burden goes way down, and so does the cost. 

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Benefits for lenders

The biggest wins for lenders — typically banks, fintechs, and financial institutions — come in the form of speed and quality of service. Automated underwriting brings: 

• Increased efficiency. Automation tools let lenders process more claims, faster, with less (or no) human effort. 
• Greater accuracy. Lenders can also review and validate more data and documents, which means fewer compliance issues and risky loans issued. 
• Better service. Customers want fast, efficient service, and ideally to serve themselves. Automated underwriting removes the need for numerous calls and in-person meets, which means lenders provide exactly what borrowers actually want.  
• More thorough eligibility testing. Institutions can check eligibility requirements for every single customer, and review every single document. They can also back-test their systems more regularly, on far larger samples of existing clients.

Lenders can now serve a broader range of companies, including SMBs, without expanding operations. Plus higher profit margins make it possible to serve smaller clients and niche businesses.

Benefits for borrowers

Access to funding is a primary challenge for SMBs, largely because it’s so operationally challenging to support them at scale. But with streamlined processes, we can more effectively support this essential segment of our economy. 

By automating the underwriting process, borrowers enjoy: 

• Instant, self-service applications. Borrowers don’t need to wait for an appointment or sit through a screening call. 
• Instant decisions. They simply upload a few documents or connect their accounting and finance systems, and the underwriting tools can instantly assess their loan eligibility. 
• Instant access to funds. If accepted, the funds can be released immediately. 
• A better lending experience. The best customer experience is fast and efficient, delivering the funds they need when they need them.
  

How to automate loan underwriting

Suppose you already offer lending services and want to make them more efficient. Adding automation is a no-brainer, so how do you proceed? 

You essentially have two options: build it yourself or embed an existing solution. Arguments can be made for either option, but we’re strong proponents of the latter. Why go through the months (and months) of engineering effort — and ongoing maintenance — to build tools that already exist? 

You’ll need expert knowledge in software development, artificial intelligence, big data usage, and a whole range of other specialized skills you likely don’t have in house. That’s a big investment, and you won’t see the benefits of automation for whole quarters — likely years. 

How to choose the right automation system

Whether you build it yourself or partner with a provider, you can’t just insert any old automation. Lending is a complex, sensitive subject, and you can’t afford to have mistakes. In fact, that’s exactly what automated processes are supposed to avoid. 

When considering your approach to automation, keep the following in mind. 

Ensure compliance & risk management

Most lenders are subject to compliance rules and regulations. These regulations continuously evolve and can be difficult to keep on top of — particularly if you don’t have dedicated compliance resources. 

Good automation is a huge benefit here. Smart tools can check every single document in detail, whereas human agents often manage only a sample. The tools stay up to date and don’t need the same level of retraining and upskilling as staff members will. 

Automated or not, you need to be sure that your processes are fit for purpose and safe for clients. So ensure that any fintech partners are regulated themselves, and have a deep understanding and respect for the rules they’re supposed to follow. 

Test & verify

Before putting any new product into general availability, it needs to be well tested and quality controlled. If you’re embedding a third-party service, make sure it has a clear track record of excellence and comes highly recommended. 

Keep a human touch

Despite all the clear benefits of automation, the goal isn’t to replace people altogether. You want to move them away from low-value-adding tasks and free them up to make more impact. Ensure there’s still opportunities to review and approve more complex cases, to meet and greet new clients, and to build long-term relationships with top customers. 

Why small business customers need better services

We’ve got a problem with the current business financing environment. Because loan underwriting and origination is costly and time consuming, lenders naturally want to prioritize larger customers. You can justify the human effort and resources required when you’re catching a whale. 

But that leaves most SMBs out of the equation. A quarter of European small businesses reportedly struggle with access to financing, and many lenders continue to tighten their loan conditions. SMBs are being left behind. Good automation can fix this. 

As Simon Taylor writes, “Lending, at its best, is a lifeline. It creates opportunities, builds businesses, and helps people weather financial storms. 

“We can use AI to create a more efficient and equitable financial system. AI can identify pockets of creditworthy consumers that other models miss and give them a chance. That's not just good business. It's just plain good.”

As you reduce overheads and bring administrative burdens down, it’s far easier to find smart financing options for small businesses. As we’ve seen, the entire underwriting process can be automated, and so can account creation and even customer support — two topics for another article. 

This is a call to support our precious SMBs. Automated underwriting makes it an easy choice. 

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Automate underwriting with embedded lending

The benefits of underwriting automation are truly too good to ignore. Whether you’re an existing lending provider, a tech company wanting to add new services, or starting from scratch, make as much use of automated underwriting as possible. 

And as noted above, the fastest and most efficient way forward is with embedded lending. Despite the complexities and constraints facing financing companies, you can be up and running in no time at all.

Or to put it differently: at Defacto, it takes an SMB 27 seconds on average to get a loan. You can offer the exact same outcome to your clients, with less effort, fewer risks, and better profit margins than ever. Partner with us and see.