Digitalisation of the lending process has brought significant benefits to financial companies, including scalability, better decisions, improved customer experience and lower costs. Whether you’re a lender, fintech or bank, an effective loan management system (LMS) is an essential component for your digital lending operation. But how do you go about comparing loan management software providers while considering the factors that are most important to your business? After all, the type of lending product you offer, size of your business, available resource and budget are all important considerations. In this article, we explore seven key factors to consider when choosing loan management software to help you understand what’s right for your company.
A loan management system is a digital platform that helps facilitate the end-to-end lending process. It helps businesses automate the loan origination process including application processing, underwriting and credit decisioning according to the lender’s criteria. Further, it can incorporate loan servicing features that involve calculating interest rates and collecting payments. Without a loan management system, all of these processes would be very time consuming, at greater risk of human error and prohibitive to business growth.
It may seem like an obvious one, but selecting a LMS that covers the type of lending service you offer, or intend to offer, is fundamentally the right place to start. Whether you cater to individuals or businesses, offer peer-to-peer lending or non-standard propositions, the right solution should be able to handle your workflow and automate those processes.
It’s also worth considering the extent to which the LMS will cater to the future needs of your business, if you reasonably expect to expand and diversify. It is becoming more commonplace for financial software vendors to operate an ecosystem of third-party apps and integrations, which can provide you with a ready list of add-on services including credit scoring apps and payment providers.
The rise of software-as-a-service (SaaS) deployment models over more traditional on-premises software implementation has been widespread in various sectors. The benefits of SaaS, which is where software is licensed on a subscription basis, include speed of implementation, lower setup and operational costs, portability and simplicity of upgrades and maintenance. SaaS and cloud computing have also enabled superior user experiences for borrowers due to improvements in efficiency and processing times. Put simply, the process of manually updating software every few years is outdated and the new paradigm is here in the form of SaaS.
There are very few scenarios where a company wants to wait longer than is necessary to take a product to market. As mentioned above, a SaaS solution is the deployment method of choice when it comes to getting set up quickly. Your overall timeline will then depend on the scope of your lending product and how fast LMS providers can help you get set up and integrated with other platforms, if needed. When discussing your requirements with vendors, get them to provide an implementation timeline and find out how long it has taken their other clients. It’s also a good time to find out how much support you’ll receive during implementation, and this is a point we’ll cover in more detail further in this article.
Finding a suitable LMS that fits with your budget is of course crucial, and there are a number of factors that will influence your spending level and schedule. Referring back to point two on deployment models, we mentioned that SaaS came with lower setup and operational costs compared with on-premises implementations. While on-premises installations typically come with a much higher upfront cost, the ongoing maintenance costs can be low and there is no subscription cost to bear. This can be an attractive option for companies with the right IT infrastructure and resource to service the software over time. If you are just looking to get started without a huge amount of capital, SaaS is a far more accessible option. Some SaaS LMS providers won’t charge any setup fees and that can be a particularly attractive option for start-up lenders.
A good LMS should make it easy to integrate with other systems and applications. Whether you’re connecting to a customer interface, data feeds, or applications for credit scoring and payments, you’ll want the process to be swift and straightforward. Make a list of applications you already use or plan to use and ask the LMS provider what integration options exist and review API documentation. Bricknode’s API documentation is available online so prospective customers can review modules at any time in the evaluation process.
As we mentioned in the first point in this list, product coverage is also an important factor here. Some LMS providers will come with more functionality built in such as customer management systems or these might be available as optional extras through a marketplace of add-ons. These options can save time if you don’t already have solutions in place, or just want certain features that are pre-integrated.
Any company implementing a new financial system should ensure that there is sufficient support during implementation and ongoing operations. Make sure that the support level is well defined and covers setup, integration, any customisations and access to ongoing support if required. The level of expertise can also vary from one LMS provider to another. You might find a provider that knows their own system inside out, but do they have market knowledge and experience running lending operations that could provide significant added value to your business?
Another point to consider is whether it could be beneficial to outsource any operational elements of your lending operation once you’re up and running. Some companies want to focus on growing their business and attracting new customers, especially if they do not have the resources needed to manage day-to-day operations. Some LMS providers offer managed services and can act as a silent partner in operating your lending business. These services are sometimes referred to as lending-as-a-service solutions and provide a complete off-the-shelf offering.
Today, so much of what we consume is through digital channels, and that’s no more true than in financial services. Security of customer data and the systems that operate these services is therefore absolutely crucial. Any LMS you consider should come with robust and up-to-date security features that prevent unauthorized access, data breaches and other compromises.
Cloud-based loan management systems often provide exceptional security because the platforms are normally hosted on one of the major cloud service providers like AWS, Google Cloud or Microsoft Azure. These providers have significant resources and maintain the highest level of security against new and emerging threats.
No matter where you are in your search for a loan management system, take the time to ensure the right fit for your business. When we speak to prospective customers about our own solution, Bricknode Lending, we also take the time to evaluate fit, so we’re both set up for success!
Neobanks have successfully disrupted the finance sector by leveraging technology to improve the customer journey, so they can match the experience delivered by the latest generation of apps like Amazon and Uber. Research by the Financial Conduct Authority (FCA) shows that Starling and Monzo, despite only receiving authorisation in 2016 and 2017 respectively, have already built their share of the UK personal account market to 8%. This growth has been largely driven by digitally-savvy younger consumers attracted by their mobile offering.
The business model of several neobanks originally relied on basic banking products such as current and savings accounts, lending and money transfers. However, neobanks have expanded their ranges to include higher-margin offerings- for instance, Starling’s Personal Finance Marketplace gives customers access to insurance, mortgages and investments.
Investments are a particularly attractive proposition due to the sheer size of the market. According to Boston Consulting Group’s latest Global Asset Management Report, the asset management industry grew by 11% in 2020 to $103 trillion. Retail investors, who hold $42 trillion of assets under management (AUM), have led this growth.
The democratization of the investment industry is well underway, as demonstrated in early 2021 by the traders who congregated at Reddit’s WallStreetBets forum and took on the professionals holding short positions in stocks like Gamestop.
A survey published in 2020 by financial services solutions provider Broadridge showed how participation is expanding. The share of the Mass Market- those with less than $100,000 to invest- grew from 30% in 2017 to 38% in 2020. Meanwhile, the Mass Affluent and High Net Worth segments stagnated or marginally declined. Millennials were the fastest-growing cohort, rising from 9% in 2017 to 14% in 2020. Together, Millennials and Generation X accounted for over 40% of the overall market.
One of the biggest drivers of this trend has been the lowering and elimination of trading fees, making the stock market much more accessible to retail investors. Silicon Valley-based Robinhood- the favoured broker of the WallStreetsBets traders- was a pioneer, offering commission-free trading on stocks and exchange traded funds (ETFs) when it launched in 2014. According to its latest results, Robinhood had 17.3 million monthly active users in December 2021 and $98 billion AUM. UK rival Freetrade is on a similar trajectory, if not quite as spectacular. Having released its app in 2018, the company revealed in October 2021 that it had reached one million users.
The major players were slow to react, but they eventually had to follow suit. Charles Schwab, among the world’s biggest brokers with nearly 33 million accounts and just short of $8 trillion AUM (as of December 2021), announced it would eliminate fees in 2019. Around the same time, Interactive Brokers, currently with 1.73 million accounts and over $350 billion AUM, launched its IBKR Lite platform offering free trading on US stocks and ETFs.
According to research conducted by Bricknode in March 20221, despite the scale of the opportunity, less than half of European consumer neobanks have introduced an investment proposition. Only 44% of Europe’s top neobanks offer investments to their customers, with 54% listing more than one asset class. Funds are the most common, followed by ETFs, stocks and cryptocurrency.
The neobanks offering investment products have adopted different business models. Two thirds have partnered with investment and SaaS solutions like Bricknode Broker, leveraging the underlying infrastructure to go to market quickly and keep costs to a minimum. One third of neobanks, meanwhile, utilise proprietary or parent company technology, and notably, most of these were owned by large incumbent banks.
To draw a conclusion from this research, neobanks are supporting the further democratization of investing, but many haven’t tapped into this sizeable income stream yet. Even among those that have, 46% have scope to increase their offering from a single asset class. One particular area of growth is sustainable investing, where Bricknode’s research showed that one quarter of neobanks provided such an offering. Dutch neobank Bunq launched an ESG product in February, to be followed shortly by Germany-based Tomorrow.
While the opportunity seems enticing, launching an investment proposition isn’t without challenges.
Time to market: the timescale involved is typically measured in years. The software and infrastructure required to manage investments are complex, and neobanks rarely have the in-house expertise to build it, let alone ensure it meets regulatory requirements.
Licensing– Few neobanks secure licenses to carry out investments because of the demanding application process, timeline and fees.
Regulatory requirements– Ensuring a fintech stays on the right side of regulations like the Markets in Financial Instruments Directive (MiFID) requires significant resources. Failure to do so risks heavy penalties- the US Financial Industry Regulatory Authority (FINRA) fined Robinhood $70 million in June 2021 for outages and misleading customers when market volatility spiked at the start of the pandemic.
Neobanks have three options when it comes to adding investments to their product range.
Building a solution in–house may grant greater control over design and implementation, but the time to market is very slow and this demands significant resources.
Partnering with a third-party investment provider presents a quicker route to market but less flexibility because neobanks are tied to the partner’s product, brand and revenue share or commercial agreement.
Buying a dedicated investment SaaS solution provides the best of both worlds – a quick route to market and complete flexibility over design, so a neobank can offer a broad investment proposition and enhance or make changes at any time. What’s more, owning the solution means the neobank receives all the revenue.
The arguments in favour of buying a SaaS solution were strong enough to persuade Revolut and Lunar, while Swedish fintechs Alwy and Sigmastocks recently decided to work with Bricknode.
Neobanks are perfectly positioned to introduce investments to their product range, so we expect an increasing number to enter this space. Barriers to entry exist, but Application Programming Interfaces (APIs) facilitate integration, allowing neobanks to add the necessary capabilities quickly and easily.
To learn more about Bricknode’s Brokerage as a Service, arrange a demo today.
1 Research carried out by Bricknode in March 2022 by analysing 81 neobanks with headquarters in Europe, based on a NeoBanks.app list plus five additional companies known to Bricknode. Pre-launch, B2B and kids/teenager neobank companies were excluded from the final analysis, leaving a sample size of 55. All investment product data including asset classes was sourced from the neobanks’ own websites or apps. Data pertaining to investment/SaaS partnerships was sourced from neobanks’ websites and press releases.