Online Loans
Effective software integration is the key to making it all happen
by Mary Shacklett
Not too long ago, an instant loan was an impossibility. Today, it's an expectation. Members used to think nothing of waiting a few days for a loan decision. Today, a wait of a few minutes is unacceptable for many members.
"We've seen demand for loan decisioning software skyrocket," says Craig Uffman, chief operating officer of Appro Systems a loan decisioning software vendor based in Baton Rouge, La. "Credit union chief executive officers [CEOs] have come to the realization that they're going to have to do Internet loans in a 24/7 environment."
In response to the realities of this marketplace, credit unions rolled up their sleeves and went to work to meet members' expectations. They designed appropriate online loan applications, performed the necessary due diligence relating to disclosures and compliance, walked members through online application processes, and delivered online loan applications to central lending functions. They also licensed decisioning software and inserted their own underwriting guidelines.
Credit unions have done all these things to offer their members the convenience of Internet loans. And for the most part, they've been successful. But the problems with Internet lending usually crop up in the back office. Many credit unions have problems when they try to achieve integration among their decisioning software vendors, forms vendors, and data processing vendors.
"If an online member can't apply for a loan and receive a response within 15 minutes, that member will go to another Web site that can meet the time frame," says Uffman. "Somehow, credit unions and others providing these products must provide the same responsiveness on the Internet as they would in the brick-and-mortar world."
Credit unions are using automated decisioning programs from their Web sites not only to offer instant loans but to cross-sell other products, says Karrie Marchese, vice president of lending for Public Service Credit Union in Denver. Marchese says members can open checking accounts from the credit union's Web site while the credit union preapproves them for credit cards and prequalifies them for auto loans. And all this happens in a matter of minutes while the member is still online. Marchese uses a product called Custom Strategist from Experian, Orange, Calif.
PURSUING A SOLUTION
Franklin Mint Federal Credit Union, Broomall, Pa., decided to pursue an automated lending system. "We wanted to present a robust lending solution over the Internet," says Allan Stevens, vice president of lending. "We now have a credit application that resides on our Web site. About 8% of our credit applications originate from our Web site. We also have 18 physical branches and one call center, and our lending volume is split equally between these two lending channels."
With present online capabilities, a member of Franklin Mint Federal can apply for a loan on its Web site by filling out an online application and submitting it. The form from Digital Insight captures the information and forwards it as an e-mail to the credit union's call center. Call center staff then enters the data from the online form into the credit union's loan origination system. The loan origination system is a DOS-based system from Creditor Resources Inc. The system has been in place for more than five years.
"We wanted to speed up the process for members and prevent staff from having to re-enter the data from one system to another," says Stevens. "We also wanted to create a 24/7 loan application environment for our members so we considered several third-party, 24/7 loan systems that we could use in conjunction with our in-house lending functions."
THE VISION
Franklin Mint Federal's first steps into Internet lending have been well-received, but the credit union has a vision of a totally integrated online loan application whereby members could apply for loans in a branch, over the telephone, or over the Internet. Members would receive an instant response along with funding if they were creditworthy, that is, if the applications received an A, B, or C rating. Applications getting a D or E rating would receive more review. The credit union would immediately disburse loan proceeds into members' share accounts.
Within this process, the member would also be evaluated by a credit union decisioning matrix that incorporates its risk-based pricing formulas. The matrix would determine the loan terms and interest rate. The "machinery" behind the instant loan approval would be a combination of the online loan application, credit report, collateral valuation, application scorecard, and decisioning package.
Uffman sees the logic in Franklin Mint Federal's vision.
"There's now an emerging vision for where a fully integrated loan application is headed," says Uffman. In practice, he believes that vision is being implemented in a series of four strategies:
1. Phase one is simply bringing the loan application form onto the Internet and letting members apply for loans using that form.
2. Many credit unions are now in phase two, which includes online loan application along with instant approval.
3. In the near future, many credit unions will start working on phase three of online loan integration by adding a set of loan documents that the consumer can print from a Web site, fill out at home, and fax or mail to a branch office.
4. In phase four, we'll see digital signature technology and e-signature regulations that will encompass the entire loan process-applying online, getting a decision, processing loan documents online, and actually transferring the loan proceeds into member accounts.
From start to finish, Uffman estimates all four phases of this online loan processing vision might take between 18 months and three years. All of this, of course, involves appropriate system integration.
It's important to have a clear online-lending vision before entering into any vendor relationship. For example, is your goal to provide Internet lending or is it to provide instant loan approval at all member-contact points? How important is it for your credit union to be able to quickly change lending policies and procedures? Set your priorities early because they'll determine which vendor services best fit your needs.
INTEGRATING ONLINE LENDING
Franklin Mint Federal's Stevens says at least half of his members would qualify for instant loans if decisioning software could be fully integrated with his credit union's online application-a critical integration requirement for phase two online loan processing.
"We researched what it would take to fully integrate the decisioning software with our loan origination system to obtain this level of integration," says Stevens. "Unless someone built an interface between the two, our employees would have to re-enter loan data into another system."
This scenario is not uncommon: A credit union searches for software solutions that fit its business objectives. It frequently discovers that the solutions it wants to implement come from multiple software vendors and they have limited integration capabilities.
Integration is a serious issue for software vendors, too. From a vendor's perspective, interface projects are often long and complicated. It takes research and development dollars and other resources to create interfaces with other software. Vendors must also monitor the commitments they need to make to upgrade their products. In the end, the number of outside software packages that a vendor selects for integration projects is carefully prioritized and calibrated to the marketplace.
"We recognize the importance of integration capabilities to our clients and we're focused on getting these interfaces in place, especially to the core information processing systems these clients use," says Uffman. "To do this, we've studied the market shares of these various information system providers, and we have a 'top 10' list that represents our strategic interface priorities. If a vendor isn't on that list and a credit union can help drive an interface to that vendor's software, then we can work from that end, too."
Franklin Mint Federal has software that doesn't have pre-existing interfaces. "We were told that connectivity existed between our Web site and our vendor's product, but it didn't," says Stevens. "The vendor plans to build an interface this year, but it doesn't exist now." Stevens says the credit union must find an alternate solution to be able to continue working toward its automated lending vision.
What approach should a credit union take if it has to drive the process of getting a software interface built between two software suppliers?
INTEGRATION STRATEGIES
"Credit unions that are faced with driving a software integration process often make the mistake of assigning the project to a lower-level technical person within the credit union," observes Uffman. "On the project side, it's usually quicker and cleaner to work directly with the other vendor that we're interfacing to as we draw up the data maps and write and test the interface. An intermediary credit union coordinator can complicate this process.
"On the other hand, if the credit union involvement comes directly from the CEO or senior management, the credit union will be more successful in getting the interface built. The real value at this level is the strength of the relationship between credit union management and the vendor. Without this, a credit union can quickly get into the classical problem of delegating decisions and project work down to where decisions can't be made quickly and the project stalls."
Even when credit unions discuss interfaces with their software suppliers from the CEO's corner office, however, they must be persistent. And there are many cases where they're still being asked to fund the interface development work. Interface work outside of the vendor's strategic targets are often treated as special projects that must wait their turn in the software production lineup. If credit unions get placed in a long waiting line for these interfaces, they must develop strategies to keep their plans moving forward while they wait.
Stevens and his staff are considering other solutions for an integrated, 24/7 lending operation as they wait for the key software interface they need to complete the vision for their ultimate online lending solution.
"One idea we've had is to go with an application solution provider [ASP], where we would initially outsource all our decisioning," says Stevens. "We're still considering that because it would mean we wouldn't need to use or purchase any decisioning software in-house. We also know that we have to migrate from an old DOS operating system, and it can be very attractive to think in terms of an ASP strategy where you simply pay as you go with no large, up-front software investment."
Nevertheless, Stevens still acknowledges that his automated lending decisions ultimately come back to the connectivity needed for full-scale software integration. "Even if you're using an ASP solution, you'll still need it to integrate with your core processing system," he says.
REVIEWING THE PROCESS
Credit union staff facing end-to-end integration decisions must weigh several considerations before making strategic decisions:
What is your credit union's vision for online lending?
Who can provide end-to-end integration of the lending process?
What if the vendors offering it don't offer the best overall fit for the credit union's overall business direction?
Some of the answers rest in the business alliances formed by loan decisioning vendors because vendors want to design interfaces between software that make integration seamless for their clients.
Vendor alliances frequently present value-added business solutions for credit unions, especially when they're using all the software programs offered by the various business partners for a given application.
Unfortunately, there are times when this solution combination doesn't come to pass in the open marketplace. What happens, for example, when a credit union discovers that its front-end Internet loan application, its loan forms package, its decisioning software, and its core processing system don't possess end-to-end integration? In these cases, the burden of integration falls on the credit union.
"The effort of integration is greater than I thought," says Stevens. "One of the things that complicates technology integration is the constantly changing technology landscape. With everything changing so rapidly, it's difficult to find a point in time to set an interface.
"People also have different ideas about how much effort an integration is going to take. The board and management can have different concepts of integration. In the end, the only way to go into a full-scale integration of decisioning software is with your eyes wide open. And even if you ask the right questions of the vendor, you'll sometimes find that the results can be very different."
RECOMMENDATIONS
"First, find out who provides your credit insurance and forms," advises Stevens. "Software from these vendors will also need to be integrated with the decisioning package as well as your core system provider. All these organizations offer integration services, but you'll need to decide which one to go with or whether you want to use an independent integrator.
"Second, take a long look at the total cost and the cleanliness of the interface. Clearly design the specification for the interface up front because, ultimately, it's your responsibility to make sure that it's the interface you need to work with your lending operations.
"Third, try to develop a strong internal team that can constantly review the issues. Talk to as many people as you can and attend conferences. You might also consider talking to a third-party integrator to complete the integration for you."
"Integration is important, but even more important is selecting 'best of breed' software packages that get you to where you want to be in automated lending," says Uffman. "As more open standards are developed in the software industry, integration issues between vendors will ease.
"In the meantime, you should be asking prospective vendors where their software is actually operational. Talk personally to references at these sites, and don't be dismayed if you hear stories about the interface development being painful, because most interface development involves some pain. Instead, be concerned with what the reference sites say about the reliability of the interface and whether it's doing what it was intended to do."
Stevens expects Franklin Mint Federal will soon have a fully integrated and automated lending solution in place. He expects members will be able to apply for and receive loan decisions from anywhere at any time.
Stevens says the biggest challenge with integrated decisioning software is understanding the many different players that are involved with the end-to-end lending process and determining who brings about the actual integration.
"There's the core data processing system, the credit insurance provider, the scoring provider, and the loan origination software provider," he says. "We don't have all of those pieces in place today, but we're learning more about them as we continue to move forward with our vision."
This article was reprinted with permission from Credit Union Magazine.
