Lending as an industry is prone to risks and frauds. The added weight of growing regulations, targeted towards traditional and marketplace lending is a critical challenge for lenders. Managing regulations, risk and compliance adherence is not an easy feat. Regtech, therefore, enters as a constructive solution to manage the challenges confronting the lending industry from a regulatory perspective.
Regulation technology, or more popularly known as regtech, offers nimble and cost effective tools and techniques to manage risk, regulations and compliance requirements.
Regtech in lending can improve operational efficiency, mitigate risks and frauds, and enhance customer due diligence (CDD) and compliance management. It can play an important role in making the lending process efficient by offering benefits as listed below:
- Operational Efficiency: Regtech can streamline the process by inducting regulatory checks and audit requirements at each step of the lending process. This reduces the probability of operational and processing errors thereby increasing the operational efficiency and effectiveness.
- Compliance Management: Regtech inculcates critical KYC (Know Your Customer) and AML (Anti Money Laundering) checks in the process to ensure that the lending process in its entirety is compliant and meets the updated and new regulations.
- Third-Party Risk Management: An efficient regtech platform can also enable you to assess the third-party program against current leading industry practices, develop roadmaps, design program offices and conduct assessments.
- Fair Lending and Other Regulation-Specific Assessments: Regtech empowers you to integrate new lending regulations like the Equal Credit Opportunity Act, Fair Housing Act, Civil Rights Act, etc., and identify opportunities for enhancements which are compliant.
Consumer Complaints Management: Regtech can help in developing a complaints management function focused on CFPB expectations and requirements to handle and reduce customer complaints and improve customer engagement.
- Data Management: Regtech also enables data modeling, scenario analysis and forecasting based on data aggregation from multiple sources. Currently banks spend huge amounts of money, particularly to complete regulators’ stress tests, which can be avoided by introducing a regulated data management system.
Regtech can expedite and smoothen the process of governance, risk management, and compliance implementation and management in lending. There are three pillars of regtech that act as individual and combined forces, cutting across the different processes of lending.
- Borrower Experience
- Data Science
I. Borrower Experience: The first and foremost pillar of regtech is borrower experience. A lending process is driven by the borrowers’ requirements. It is pertinent that lenders take care of the borrower experience in different phases of lending. Interestingly, according to KPMG research, between 2013 and 2014, regulatory pressures, a new trust agenda and rapid progress on digital services drove up customer experience improvement by 1%. Between 2014 and 2015, however, this improvement was flat. This is majorly due to the deviations and discrepancies between the current approach towards lending and the desired approach that needs to be followed.
The current approach is more product centric, manual and depends on FICO-based risk analysis by the majority of banks and financial institutions. The desired approach though, requires to place the borrower at the core of the lending process and devise the financial offerings and processes around it. The lending process should therefore be more customer centric and automated with a broader perspective on risk analysis and credit scoring, by including data points based on FICO, big data analysis and predictive modeling.
II. Data Science: The second pillar supporting regtech is data science. With the emergence of big data and machine learning, data science has evolved as a substantial domain. Data science can amplify the intellect and accuracy behind loan processing and management by many folds. The traditional approach largely depends on credit scoring and financial analysis with limited data to arrive at loan approvals and processing. The desired approach however requires a multitude of data points like cash flow analysis, macro-economic factors, likelihood of bankruptcy, bank transactions, predictive models and more, to be accessed and analyzed to arrive at a decision.
Data science, with the unification of machine learning and big data, enables predictive modeling in credit scoring and can also help in streamlining the lending process, eliminating errors and expediting the loan application approval process. It can also help in predicting bad loans and in on-going monitoring of loans.
III. Automation: The third and most impactful pillar empowering regtech is automation. Contrary to the traditional deal room, automation can accelerate the loan management process. Online lending platforms like Cloud Lending Solutions, built on cloud-based technology can advance the lending process at each step. The cloud-based technology, vis-a-vis a traditional legacy lending framework, offers benefits which help in countering risks and frauds and assuring compliance management and adherence.
The highly configurable open architecture provides an end-to-end loan management solution for online and marketplace lenders, from origination and underwriting to servicing and collections. Automation can thereby improve and expedite lending by:
- Automating and simplifying the origination and underwriting process with auto decisioning
- Configuring automated workflows to adapt to evolving market requirements
- Integrating effortlessly across disparate systems to optimize business processes
- Automating the lending platform via an open architecture as per the unique business needs of the lender
- Managing customer contact requirements
The three pillars of regtech therefore, when implemented can improve the workflow and end-to-end loan management process.