Use the Power of “Why?” to Boost Digital Lending
March 24, 2021
7 minute read – Consider these recent digital lending trends:
- Digital channel loan app volume is growing faster than branch channel volume
- Digital loan apps are less likely to be approved than branch apps
- Approved digital loan apps are less likely to fund than approved branch apps
At the intersection of these trends are a growing number of loan apps at risk of slipping through your fingers. As the shift from branch to digital continues, understanding how your institution is performing provides the opportunity to act on needed changes sooner rather than later.
Using some typical approval and funding percentages that reflect the trends, the example institution below would need to bring 78% more digital apps through the door in order to get the same number of loans on the books as through the branch channel. In other words, to fund 640 loans through the branch channel requires 1000 opportunities, but to fund 640 loans through the digital channel requires 1779 opportunities.
Even with significantly better approval and funding percentages, the institution below needs 30% more applications through the digital channel.
The question is why? Before improvements can be made, the reasons for the trends need to be clearly understood. To get to the why, you need:
- Business intelligence to show where there could be a problem. For example, can you easily see the approval and funding percentages by channel as shown above? Do you know how long different phases of the process take? Can you quickly view by credit tier?
- Asking “Why?5”. You’ve probably heard of the “5 Whys” technique, originally developed by Sakichi Toyoda. It involves asking “Why?” multiple times until the root cause of a problem is revealed. Answering the 5 (or more) whys helps in thinking through the problem, but sometimes the answers are theories which need to be validated
- Validating the whys with business intelligence or further investigation. If the answer to a “Why?” question is a theory, it should be validated
Taking the example above, the numbers show that there is a lot of revenue that could be left on the table as customer preferences shift to the digital channel. Business intelligence helps identify some issues. Asking “Why?” to the power of 5 will help reach the root causes. This could go down various lines of questioning, so we’ll only follow a few here as we consider the differences between the digital and branch channels.
- Why are a lower percentage of digital apps approved?
- If the top-of-mind response is “because we receive a lot of low-quality apps that aren’t within underwriting guidelines”, you should verify that this is true. In many cases, digital channel apps within the same credit tier have very different approval rates from branch apps. Check your approval ratios by credit tier.
- Why are a lower percentage of digital apps within the same credit tier approved?
- The customer didn’t respond to our request for additional information
- Why didn’t the customer respond?
You might be able to uncover some clues, by taking a sampling of digital apps where the customer didn’t respond, to see what was going on. Here are some common theories:
- Customers are waiting too long for a decision. Remember that the institution approving a loan app and the customer knowing they’re approved are two different things
- They didn’t like the counteroffer
- The institution is requesting too much information from the customer
- We don’t really have “the story” to be able to approve borderline apps
- The app itself is confusing so more follow-up is needed to clarify answers
- The applicant applied to multiple institutions
Every one of the theories put forward should be validated. Once valid, “Why?” needs to be asked again and again until the root cause is revealed.
Consider the example where the theory is that customers are waiting too long for a decision. Use business intelligence to verify or dig into a sampling of apps if the data is not available. Assuming the theory is valid, you’ll need to ask why they are waiting so long, and so on.
It could go something like this:
At this point the root cause is revealed. A decision to lower the priority of digital apps that might have made sense when there were very few of them can now be addressed.
It’s important to go into this with a positive mindset. It’s not at all about finding out whose fault it is and assigning blame. It’s about uncovering what is truly happening so that more lending opportunities can be realized. It’s like a science experiment where you disassemble the pieces in order to understand them better so that changes can be made.
Now what? Once you’re to the root cause, the next step is to decide on and make changes. It is easy to view some of the more difficult revelations as valid reasons for decreased performance and stop there. But those revelations are actually springboards for creative solutions, not to mention a stronger financial future. If lending is the main economic engine for your institution, it will not help to rationalize why it isn’t running at peak.
Continuing the example, perhaps you’ve found that a good percentage of applicants are applying to more than one institution so they aren’t getting back to you because they’ve accepted another offer. It may be true that several institutions will lose in the multiple application game, but accepting that as a fact that can’t be countered won’t help the bottom line. In fact, many organizations have already solved this particular problem in the indirect lending space where the processes are often far more efficient than direct lending. Indirect lenders know that dealers will apply to multiple institutions and will not wait very long at all for most decisions, so they design their processes to meet expectations and capture as many as they can.
The foundation for success is deep curiosity coupled with the ability to view your processes like your strongest competitor would, and a willingness to make real changes.
A deep dive into important questions surrounding digital lending can reveal the whys that may not be obvious. You can’t fix what you don’t know is broken, and it’s hard to see what’s broken without adequate business intelligence and the will to dig in. Your organization needs to zero in on anything that is getting in the way of this increasingly important channel’s success so the path can be cleared to optimize digital lending.