Origination Automation: Is There Low Hanging Fruit?
In a recent CEB TowerGroup webinar industry analyst Frank Bria stated that all the low hanging fruit of automation has already been accomplished. In a sense, this is certainly true. Banks have invested in automation for decades, focusing on the parts of the process that will provide the best return on investment (ROI). As a result, much if not all of the low hanging fruit has been addressed. Unfortunately, this opportunistic approach has left much of the origination process at many institutions with risky manual gaps.
About three years ago, a banker shared with me one of the manual steps in their automated origination process. When loan applications required a manual review they would box up the paper applications and ship them across the country to their underwriting office. Once there, the stipulations or flags were cleared and the remaining steps of the applications were completed manually. While the process was labor intensive and expensive, the real issue was risk. That risk became clear when two of the boxes failed to arrive one day. Suddenly the institution was faced with a data breach involving personally identifiable information. Over the next six months, we helped them automate that process and eliminate the paper processing. They still complete manual reviews with human interaction, but they accomplish them safely and efficiently. The point is that even today, many institutions have significant manual processes in spite of their efforts at automation.
The challenge faced by institutions today is to transition from the opportunistic automation approach that has captured much of banks’ budgets for decades to a more systemic approach. By this, I mean institutions must consider the totality of their process requirements, not just the step in a process that yields the greatest ROI. In some circles this concept is referred to as strategic automation or straight through processing. Regardless of the name, the key value is to automate everything in the process that can be automated, then focus on bringing efficiency to those remaining steps that still require manual intervention.
The advantage of strategic automation is twofold. First, by looking at the entire origination process and seeking to automate every feasible part, there can be unexpected efficiency gains. For example, a piecemeal approach will often result in redundant processes or the need to run an application back from the beginning of the process after a stipulation is cleared. Second, it enables the institution to manage both credit and institutional risk far more effectively. By considering the entire process at once with a single set of eyes, it is less likely that exceptions in the process will be overlooked and left operating with risky procedures. While there is overhead to this process, it is far more effective, not to mention less risky, than mailing boxes of applications across the country.
A more subtle value of strategic automation is it requires an institutional approach to decision-making. When institutions take an opportunistic approach to software solutions they often choose vendors or software with shortcomings that are not yet visible. Over time as the scope of the project expands, the shortcomings of the vendors become evident. At this point it’s not uncommon to simply add additional vendors who can address these gaps and focus the IT budget on integration. The resulting hodgepodge of software, while technically addressing all of the low hanging opportunities for automation, is expensive to maintain and unable to scale with business. Stepping back and looking at the entire process, whether that be the origination process, origination across the enterprise, or the entire credit lifecycle, enables the institution to define requirements will be able to grow with the organization’s needs.
If you find yourself in a situation where gaps in your origination process are not cost effective or adding risk, please share your experiences.