Online platforms that mediate loans between financial institutions and customers are gaining more and more market share. Banks that cooperate with them have a clear advantage. However, there are structural and procedural challenges associated with the collaboration.
This is how the cooperation with credit brokerage platforms works.
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Banks can no longer rely on customers to automatically access their loan offer when required. The number of competitors is large and their services are easily accessible via the Internet. For the independent brokerage of loans, new and in some cases large players such as loan brokerage platforms (CIPs) have already established themselves on the market. In the first nine months of 2020, Hypoport SE and its subsidiaries achieved a share of more than 25 percent of all construction loans concluded in Germany.
Increasing new business through CIPs
It is becoming increasingly difficult for financial institutions to place their loan portfolio directly through their previously used distribution channels. Customers and independent agents are increasingly relying on CIPs to compare conditions and determine the best provider – the corona crisis is also fueling this trend. Cooperation with CIPs has therefore become all the more important for banks in order to remain in the market.
However, the institutes often reach their limits in the (digital) implementation. Because although the number of financings brokered via CIPs has been rising steadily for several years, the loan brokerage process of many platforms can be described as “immature”. The consequences of the process, which needs to be optimized, are felt primarily by the banks: They are overwhelmed with sometimes unqualified inquiries and have to take long communication channels.
Two essential core problems in cooperation
With regard to successful cooperation between banks and platforms, there are two main challenges:
- Lack of quality assurance – time is money
- Information congestion with consequences
1. Poor quality assurance – time is money
The mediation process often works as follows: The customer needs a quick decision about a financing transaction and turns to an intermediary. This receives the financing request and enters all the necessary data about the respective CIPs. If the broker in the system now receives, for example, 15 offers (from credit institutions that are fundamentally eligible for financing due to the data comparison), he can submit the loan request to these 15 banks for a qualified check – it is not uncommon for this to happen twice over several CIPs, which the mediator uses.
The problem: The system of some CIPs does not ask the agent continuously and usually only very late to determine the status of the individual request – completed, withdrawn or active. The intermediaries rarely give this status without being asked. This can lead to one of the 15 banks being awarded the contract, but the other 14 banks not being informed and further checking the request. This ties up considerable human resources.
2. Information congestion with consequences
The information quality of the inquiries transmitted via the platforms is also challenging. Because the standard queries of the CIPs are often not designed individually for the banks. Soft criteria, which can lead to rejection at some banks due to the deviation from their standard business, are not taken into account in advance. This includes, among other things, excessive personal contributions, land register entries such as usage and residential rights and the number of owners of a property when buying a condominium.
This puts banks on the grid of “potential lenders” who will reject the financing request on the basis of precisely these criteria in the ongoing process. On the other hand, the CIPs in turn lack additional information from the institutes. However, these would be helpful to see financing trends right from the start and to exclude unsuitable options directly.
This information backlog also has far-reaching consequences for the quality of communication between CIP, financial institution, independent broker and borrower. Because if the broker (or the customer) has an inquiry or query to the bank, he usually has to inquire about it via a supervisor of the platform, who then in turn contacts the bank. In the best case, the supervisor receives an answer – which is often associated with a considerable waiting time – and forwards it to the agent. If this process runs with errors or misunderstandings, the end customer waits even longer for the financing to be concluded.
Recognize optimization potential
In order to align the bank’s internal credit process to the cooperation with CIPs, there are several possible solutions for the institutes:
- Digital interfaces
- Process optimization
- product design
Digital interfaces
Uniform interfaces are advantageous for the delivery of the data. This means that an initial technical and structural check of the data takes place automatically when the application is submitted. Manual follow-up steps are reduced in this way or, at best, are no longer necessary. If a communication module is also implemented, which controls and tracks the exchange between the credit institute and CIP, this additionally increases transparency for all parties involved.
Process optimization
The existing credit processes are usually designed for classic branch business and are often characterized by manual work steps. In order not to increase the complexity of this functioning process, banks should consider establishing a second credit process geared towards brokering third parties. With the digital delivery of the processes of an external partner, further optimization potential can be raised.
product design
In the future, banks could use product management to develop standardized offers that are tailored to work with CIPs. These not only make it easier for the agent or online customer to make a choice, but also reduce the processing effort for the banks, which can more easily check inquiries about the standard product. However, this change is not easy. Among other things, the following questions arise: How do I define a mortgage offer in this regard? Does it make more sense to develop a new product that is precisely tailored to the CIP?
Benefit from CIPs
Conventional financing advice will remain a not insignificant cost factor for the majority of banks in the long term. Anyone who uses CIPs as an additional sales channel and closely meshes their lending process with the online platforms can benefit from their market penetration. With an optimized product range as well as the digitization of processes and lean communication channels, financial institutions can adapt well to the changed market conditions in the long term. Support from external service providers can be an advantage here.
Alexander Strassberger
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Alexander Strassberger is co-author of the article. He is managing consultant and account manager for the savings bank finance group at FORT.SCHRITT GmbH. His focus is on credit and sales processes. The trained banking economist has been working as a consultant in banking IT and at credit institutions for twelve years.
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