61% of Mid-Sized Banks Eye Fully Automated Lending

Digital lending is at a crossroads as financial institutions and banks grapple with modernizing their loan processes, revealing a significant divide between readiness for consumers and small businesses.

A recent PYMNTS Intelligence report, “The State of Digital Lending Readiness,” shed light on the varying degrees to which banks are equipped to handle lending in the digital age.

The August 2024 study, based on a survey of 45 senior executives at mid-sized banks, including community banks, regional banks and credit unions (CUs), reveals that while most financial institutions believe their lending processes are strong, the reality of their digital capabilities paints a different picture.

Digital lending readiness is defined as the technological and operational capabilities enabling banks to efficiently and securely process, approve and disburse loans digitally. The report highlighted that a key driver for digitizing and automating lending is the pursuit of operational efficiency and improved application experiences, yet many mid-sized banks struggle to keep pace with larger institutions in meeting customer needs.

The findings underscored a significant disparity in automation levels, with consumer lending processes being far more automated than those designed for small- to medium-sized businesses (SMBs). While 70% of financial institutions report having mostly automated consumer lending, only around one-third have achieved similar automation for SMB lending.

This automation gap translates to slower fulfillment times, with only one in four banks able to complete the loan process from application to disbursement for both consumers and SMBs on the same day. In fact, a mere 7% of banks can fulfill consumer loans within minutes, and even fewer can do so for SMB loans. The report also identified internal roadblocks hindering the adoption of digital lending platforms, including organizational reluctance, technical integration issues and budget constraints.

Here are three key data points from the report:

Only 28% of mid-sized community banks, regional banks and CUs can fulfill loans to both consumers and SMBs on the same day. This highlights a significant bottleneck in lending efficiency for a large segment of the financial industry.

The delinquency rate for consumer loans is 2.1% for banks relying less on digital lending platforms, compared to just 1.2% for those relying more on these platforms. This suggests that automation is not only linked to faster fulfillment but also to better risk management.

79% of banks worry about automation’s impacts on the customer-banker relationship, contributing to organizational reluctance in adopting digital lending platforms. This reveals a key cultural challenge in the shift toward digital lending.

Looking ahead, the report indicates a strong interest among banks in expanding automation, with 61% highly interested in moving to fully automated lending processes, and half aiming to do so within the next two years. Mid-sized banks plan to invest an estimated average of $186 million in lending innovation over the next 12 months.

Notably, financial institutions using digital lending platforms for more than half of their lending are significantly more likely to achieve faster loan fulfillment and lower delinquency rates. While approval rates remain similar across different levels of automation, delinquency rates are notably lower for banks with more automated processes.

Overcoming internal barriers and embracing digital transformation, including leveraging artificial intelligence, are identified as crucial steps for banks to enhance their lending operations, improve customer experiences, and remain competitive.