The rise in digital technologies has raised customers’ expectations of financial services and lenders.
For today’s customers, the traditional loan processes are lengthy and tedious. They expect lenders to process loans and disburse funds quickly. And very often, this expectation in addition to the interest rate is considered a primary criterion when choosing a lender for credit requests.
As new players flood the credit market, it’s becoming more imperative for lenders to live up to these demands, and disburse loans faster to retain customers. Delays in loan disbursements translate to a loss of business to competitors.
Automation has emerged as the newest buzzword in the credit space. However, it is more than just industry jargon — it is a huge deal.
In this article, we will cover the fundamentals of automation and how automation can improve your loan disbursement process, make your customers happier, and increase customer retention.
Back to Basics
Disbursement of a loan occurs when the agreed-upon sum is actually paid into the borrower’s account, and is then made accessible for use i.e the lender’s account has been debited, and the borrower’s account has been credited¹.
A lot of financial services and lenders still rely on manual, paper-based techniques in their overall loan process. This method of loan processing requires more human effort, resulting in higher labor costs, and also requires a lot of paperwork that hinder timely loan processing.
The future of lending thus lies in leveraging digital solutions to speed up the overall credit process.
Through digital lending, lenders can efficiently offer loans with little-to-no-human involvement by automating some or all of their loan application components, including loan disbursement.
What is Automated Loan Processing?
Automation is the development and use of technology to deliver products and/or services, requiring little-to-no-human involvement.
Many tasks that were formerly carried out by people are now more efficient, consistent, and faster because of the use of automated technologies and processes.
Fintech is one of the fastest growing industries in Africa, and the digital lending market as a prominent driver of that growth, is also revolutionizing Africa’s overall consumer credit market.
According to the commonwealth chamber of commerce², 40% of Africans prefer online payment and there has been a 102% increase in online alternative financing from 104 million USD in 2017 to 563.8 million USD in 2022. This is expected to increase at an annual growth rate of 5.7% till 2026.
Following the footsteps of their global counterparts, many of Africa’s lending companies and financial services such as Grooming Microfinance Bank, are now automating their credit processes using automated loan processing tools like Originate.
These tools provide end-to-end loan processing automation, covering the entire loan life cycle — from loan origination to application, risk assessment, decisioning, disbursement and loan recovery.
Although, some may argue that the financial sector has too many risks to give away so much control, utilising an automated loan processing solution has allowed these lenders to close loans faster with improved operational efficiency. Hence, allowing them to remain competitive and profitable in the present world.
What Does Automated Disbursement Mean for Lenders?
Having discussed the fundamentals of automation and its role in the lending process, the concept of automated disbursement is fairly easy to explain. It is simply the automatic payment of an approved loan to a borrower’s account, following approval.
According to a report by PYMNTS³, the three main things borrowers want to know when taking a loan are:
- The chances of them getting the money
- When they will get the money
- How much the loan will cost them.
The report further stated that 60% of consumers and micro-businesses said they would be likely to do business if offered free instant disbursements.
This proves that faster disbursements are now a key parameter for consumers when choosing a lender. When a lender cannot disburse loans as fast as consumers want, they easily switch to other lenders who can.
Automation provides the speed that lenders need in order to fulfill their customers’ needs and stay in business. It also removes the potential human errors associated with loan disbursements, while also lowering the business’ running cost.
Unfortunately, the main advantage of automated disbursement — its speed — is also its largest risk.
When a loan is disbursed instantly, it becomes immediately available to the receiver. If the money is disbursed to the right person, it’s a wonderful experience that leaves both the customer and lender happy. However, if otherwise is the case, and the borrower turns out to be a defaulter or even worse a fraudster, then this turns out to be a loss for the lender as the disbursement is irreversible, and collection is almost impossible in such cases.
This risk can be mitigated by putting in place the right automation solutions that cover not just the disbursement process, but also the underwriting process, ensuring that only properly verified applicants are approved for loan disbursement.
How Can Lenders Automate Loan Disbursement?
Considering disbursement does not happen as a siloed aspect of the lending process, and there are dependencies, financial services should have the following tools in place for a successful automated loan disbursement.
- A decisioning engine to check the applicant’s credit eligibility
- Integration with reliable payment service providers to automate the disbursement
- A recovery tool to ensure you recover the disbursed loan
Products like Originate are designed to help you achieve all these, with the option to integrate with third-party tools for more capabilities, hence ensuring that you enjoy an end-to-end automated lending process.
In conclusion, with advancing technology, we are headed towards a future of increased automation. Automating the lending process allows financial institutions and lenders to remain competitive in the foreseeable future, while also achieving higher levels of productivity and efficiency, reduced costs, and more satisfied customers — all of which contribute to higher profit margins.
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