61% of CFIs Plan to Have Fully Automated Lending in Two Years

In 1956, American engineer Donald G. Moore filed a patent for a “robot floor cleaner” that would be controlled by a single button and could be programmed to vacuum and mop a room by following a pre-determined path. Although Moore’s plans never came to fruition, the concept resurfaced in 1996 when  Electrolux introduced the Trilobite, the first commercially marketed robotic vacuum. However, Electrolux’s vacuum had navigation issues and never really took off. It was only in 2002 when iRobot introduced its Roomba that the automatic vacuum finally became commercially viable.The Roomba is still available today, but the product’s popularity has waned over the years as more sophisticated and advanced models have come to market. Indeed, the world of automation has expanded in capability and popularity in the past few years, even making its way into commercial applications. In the financial world, automation is causing a stir in lending. As the banking industry races to embrace fully automated lending, individual organizations are discovering that there are significant disparities that exist between the ease of automating loans to consumers versus small- and medium-sized businesses (SMBs), and that automation is an ever-evolving process.Automated Lending Gaining MomentumAs real-time banking services have become the norm, consumers and business owners alike have come to desire automation and rapid responses for everything, including loans. Faced with the threat of losing business to fintechs and larger banks that have already automated such offerings, community financial institutions (CFIs) are rushing to embrace fully automated lending, where they can rapidly approve and pay out loans in a secure manner. Market research firm IMARC Group predicts that the value of global digital lending, which was at $13B in 2024, will reach $39.8B by 2033. According to “The State of Digital Lending Readiness,” a recent PYMNTS Intelligence report, 61% of midsized financial institutions (which includes community financial institutions) are extremely interested in fully automating lending within their organizations, but only 7% of businesses within this group expect to reach their goals within the next 12 months. Among banks that have already embraced automation, there is also a sizeable gap between consumer lending and lending to SMBs. Barriers to Fully Automated SMB LendingFactors keeping CFIs from fully automating lending include costs, reluctance among leadership, fears about the impact automation will have on the customer relationship, and even concerns regarding potential biases within the algorithms used to determine the viability of borrowers. Integration with legacy systems is also a major challenge, with roughly half of CFIs citing integration as a major impediment. As a result of such challenges, along with greater complexity in the factors that determine SMB lending, financial institutions have found it easier to automate consumer lending than lending to SMBs. Though roughly 70% of financial institutions have largely automated consumer lending and can give applicants a decision and funds on the same day, only 33% of financial institutions have achieved similar results for SMB lending. Plus, financial institutions across the board still seem to be struggling with speed, with only 7% of banks able to execute and fulfill loan applications within minutes. Benefits of Automated Lending for CFIsDespite the high costs and hurdles involved, automating the lending process can be extremely valuable for financial institutions. Beyond the fact that consumers’ expectations of speed make it a necessity for financial institutions that want to remain competitive, automating lending can provide a more personalized customer service experience and can even help with risk management. According to the findings of “The State of Digital Lending Readiness,” financial institutions that have automated their lending process experience lower delinquency rates than those with manual lending processes. The delinquency rate in consumer lending for financial institutions that rely less on digital lending platforms is 2.1%, compared to 1.2% for organizations that have automated 50% of their process or more. Similarly, the delinquency rate for SMB lending among less automated financial institutions is 1.6%, compared with a 0.9% rate among organizations with more automation. The Road AheadAware of the importance of automating the lending process, financial institutions are gearing up to make significant investments in such technology. The average midsized financial institution expects to invest $186MM in automation initiatives within the next 12 months, and 61% of financial institutions aim to implement fully automated lending within the next two years. As CFIs strive to remain competitive on the lending front, automated lending is an inevitability. Though challenges persist, organizations that fail to automate will find themselves at a major competitive disadvantage. Automated lending can help reduce risks, lower fraud, and provide a heightened customer experience. Though there will always be a need for some sort of manual intervention, now is the time that CFIs need to start strategically looking at how they will implement automated lending and keeping tabs on what their competitors are doing on this front.