Jeff Keltner from Online Lending Startup Upstart Explains how the Modern Digital Lending Process Works

Online lending platform UpStart (UPST:NASDAQ) has noted that there are four levels of digital lending.

Jeff Keltner, SVP of Business Development at UpStart, writes in a blog post that he has been thinking for some time now about the key trends he’s observing towards the digital lending experience.

Keltner adds that from Covid-related limitations to branch openings and peoples’ “apprehension to step into a branch,” he knows many banking institutions have been accelerating their plans to make strategic investments in systems while digitizing the lending experience.

Keltner further noted that he’s seen the banks “move towards digital lending via a variety of paths.” He also mentioned that certain banks are “taking a methodical series of steps to progress towards full automation, while other banks are more ambitious and leapfrog to the highest levels of automation.”

He explained:

“With each level, there are different degrees of investment required in terms of systems and internal resources. And with each stage, lenders can expect to impact the customer experience, and their performance, to different degrees.”

He points out that his goal in offering more clarity on these levels of digital lending is “to help others learn from some of our experiences at Upstart and in the technology industry generally.” He also noted that if he had to leave you with some core or important principles for “accelerating” digital lending transformation, then it would include “looking through the lens of the actual consumer experience.”

He pointed out that we need to “avoid the trap of just digitizing your existing manual origination and underwriting processes.” He recommends using digital lending in a strategic manner in order to help with growing or expanding out current household relationships and “expand into new households in your bank footprint.”

Keltner added:

“The first level of moving any process of online lending is typically to build a digital front-end for the consumer experience. As this process begins, digitization usually doesn’t flow through the whole process. In consumer lending, this often means an online application triggers an offline follow up through a phone call or in-person visit. Many lenders have already achieved this level of digitization (though certainly not all lenders, and not for all of their product offerings).” 

Keltner further noted that in the second level, lenders have been able to move from an online application that “kicks off an offline process to a fully digitized, end-to-end process.” But these processes are “often more or less carbon copies of the old, offline processes,” Keltner explains.

For instance, these digitized processes still need a manual review of underwriting and “having applicants upload multiple documents such as photo IDs and pay stubs that otherwise might have been given to a loan officer or underwriter in person,” Keltner added.

He further explained that the uploaded documents are then “manually reviewed by a bank employee in an office—largely replicating the in-person branch experience.” He also mentioned that this usually leads to “a slower time to originate a loan, as the manual back-end processes take time—and again can lead many users to simply abandon the process.” He adds that he “sometimes refers to this process as the digitization of legacy processes.”

Keltner continued:

“In Level III, … you are finding ways to transform the approval and closing process to take advantage of uniquely digital capabilities for both your customer and your employees.”

He added that initially, “a fully digital lending process should enable instant underwriting decisions for all applicants—ideally using a soft credit pull that won’t hurt their credit score.” He further noted that “once you’ve  begun using automated decisioning that can process large amounts of data, there’s little reason to have underwriters look at exceptions to policy based on ‘compensating factors’.” Those decisions “can be automated—and improved—with newer technologies” and this can “lead to faster decisions, better credit results, and happier customers,” Keltner noted.

He continued:

“Second, the full approval and closing process can often be simplified in a digital environment. Verifying identity through the presentation of an ID, or income through the presentation of bank statements, often makes sense. However, it is now possible to improve and, often, fully automate these verification processes in an online context, leading to increased close rates and potential for lower loss rates.”

He also mentioned that beyond Level III, lenders “have the ability to further improve outcomes by leveraging advanced technologies like machine learning to drive better decisions.” This allows lenders “not only to automate their older processes, but to dramatically improve them with further advanced analytics,” he noted while adding that banks that “take advantage of these technologies unlock the opportunity to expand their loan portfolio with their existing customers and also attract and grow new households—without increasing their portfolio risk.”

It’s worth notng that Upstart shares closed at $164.87 yesterday (on March 22, 2021).

Notably, that’s up considerably from just $60.79 this past week.

After managing to reach a $2.1 billion market cap after it made its debut this past December, the firm’s valuation has jumped to over $12 billion. As reported by CNBC, the company recently confirmed that it is anticipating its busness growth to accelerate further this year.

Upstart leverages machine learning to underwrite consumer loans and offers its technology to various banking partners. These financial institutions use the tech to handle more specific or targeted underwriting processes. Upstart’s management has noted that the firm’s revenue this quarter has come from originating nearly 124,000 loans. But some demand began to decline last year due to the challenges related to the Covid-19 pandemic.

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