Commercial loan servicing is a crucial aspect of lending services, which can impact the borrower’s experience and business outcomes.
Loan servicing encompasses processes associated with collecting monthly payments, sending out statements, following up on defaults, collecting and paying taxes, handling delinquent accounts, maintaining documentation, etc.
This blog post outlines some of the challenges concerning commercial loan servicing processes along with the strategies to address them.
Challenges to Servicing Commercial Loans
Process execution gaps, excessive manual involvement, and disconnected systems are some of the primary challenges that result in inefficiencies and higher servicing costs. Additionally, the ongoing efforts necessary for complying with regulations also increase loan servicing costs and risks.
The business risks can be due to inadequate due diligence, execution gaps, and similar reasons; for example, insufficient understanding of the latest or emergent regulations can impede customer experience and regulatory compliance.
The Paycheck Protection Program (PPP) loan introduced in 2021 is a recent example. Introduced to help small businesses, self-employed workers, and other entities, the PPP program introduced specific regulatory requirements, expanding the ambit of required expertise for financial institutions.
A report by American Bankers Association illuminates the impact of loan servicing challenges on customer experience. The report states, “Traditional banks are at risk of losing their competitive advantage if they do not meet customers with the services they expect wherever they are.”
A pragmatic combination of digital technologies such as robotic process automation and data analytics with a consultative approach can help improve the process efficiency and accuracy. In tandem, employee upskilling and gradual cultural shifts can transform commercial lending services.
Strategies to Improve Commercial Loan Servicing
Here are some of the strategies and approaches:
1. Automation-First Mindset
The banking and financial services industry has been on its way forward to optimizing efficiencies and costs. Digital solutions such as Robotic Process Automation (RPA), document extraction and indexing, machine learning, NLP-powered chatbots, etc., can help commercial lenders offer faster and better servicing experiences to customers. Intelligent digital solutions can also free up the skilled workforce for more strategic tasks, increasing the ROI and business impact. McKinsey informs that machines will soon perform an estimated 10-25% of banking functions, allowing employees to do higher-value tasks.
The key lies in maximizing the collective impact of human talent and machine intelligence rather than replacing humans with machines, which is a misconceived notion.
2. Leverage Data for Customer Insights
In the rapidly digitizing financial services landscape, customers expect personalized experiences across the channels they use. Lending institutions need to acquire a deep understanding of their customer’s pain points and preferences, which is possible with the vast availability of customer data in the form of documented records, behavioral/preference data, etc.
Predictive analytics solutions can help financial institutions forecast future events such as retention rate, default rate, etc., based on the historical data for a given customer. Predictive analytics solutions use statistical modeling and data mining to draw customer insights that can help lenders make key decisions to improve servicing quality, determine potential risks, etc.
3. Focus on Employee Skilling
Upskilling and reskilling the workforce to perform tasks with higher accuracy and efficiency can improve business outcomes across the front, middle, and back office. Also, building new capabilities and competencies can help financial institutions, including lenders, attain a competitive advantage because the outcomes depend on both digital adoption and human proficiencies.
From the standpoint of servicing commercial loans, employee upskilling can help improve customer engagement by delivering better service quality, relationship management, and prompt risk management.
A Consultative and Practical Approach
Transforming commercial lending services essentially needs a holistic approach based on data-led insights and practicality. For example, how does an institution redesign or optimize the servicing ecosystem unless it pinpoints the specific areas that need intervention?
A thoughtful consultative approach can uncover the areas to guide the next steps, and data-led insights can validate the findings based on customer behavioral patterns, the performance of servicing team, etc. Additionally, implementing the identified solutions is also critical for driving the outcomes.
The Digital Knowledge Operations™ approach is designed to simplify the process and enable a realistic transformation of financial services. It combines real-world domain expertise with digital intellect and managed operations to offer a holistic solution.
Chief Delivery Officer
Atul is an executive leader with over 22 years of experience in strategic business planning, transformation, business development, operational excellence, and talent management in the BFSI domain. His expertise spans building business functions across geographies and domains, including Retail & Corporate Banking, Lending, and Compliance.