Straight Through Processing (STP) Commercial Lending s Straight Shot to Success John O Connor BenchMark Consulting International Straight Through Processing (STP) is a process technology supported by policy that allows an organization to enter the elements of a loan request along with all supporting data (financial statements, tax returns, balance sheets, profit/loss statements, etc) and then re-use the information throughout the entire application/credit decision lifecycle. The states of the credit value chain include prospecting, financial analysis, scoring, credit decisioning, vendor documentation (ordering, receiving, reviewing), document preparation and finally the loading of all information into a loan accounting system. Throughout the entire chain, information is entered and used by all participants in the deal process but the individual elements of information are entered only once. The benefit of STP is a promising and long sought goal in the lending arena: eliminate the re-keying of data throughout the lending process and automate as much of that process as possible - from beginning to end. Additional benefits of STP include the reduction of turn times and increased capture rates. STP holds the potential to not only speed processes and make the organization more effective, but can be a step in the dramatic, positive transformation of the entire organization, streamlining operations from front to back and top to bottom. As more transactional data becomes soft and available for business intelligence, sales, and risk management, the wider the impact and bigger the long-term payoff of STP. In the financial services sector, great strides have been made toward end-to-end STP. Over the past 40 years, the credit card industry, in particular, has become tremendously efficient with pertransaction cost driven down to the smallest fractions of a cent and in an entirely paperless environment. Additionally, consumer lending (first mortgage, home equity, direct lending) has been streamlined through the use of STP platforms by employing credit scoring, rules-based decisioning, and imaging technologies in a single end-to-end context. However, even though some institutions have solved for credit card, small business and consumer lending, some organization still struggle with separate systems that do not talk to each other. It is still difficult for these institutions to meet the customer s needs across all the lending platforms. Significant value is to be found for all areas of lending. On the commercial lending side, progress has been made within some organizations in small business and progress is being made in the middle market lending tiers. Some of the more forwardthinking organizations have realized significant progress in both sectors. For the purposes of this paper, small business is defined as sales of $10 Million and less, and middle market between $10 and $500 million in sales. STP Value Historically, the focus of those in commercial lending had been on the art rather than the science of lending. Lending was a face to face, relationship-based affair where decisions were made as much by instinct as empirical data. Copyright 2006 BenchMark Consulting International, N.A., Inc. All Rights Reserved.
Today there is an extraordinary wealth of science available to the modern lender. The value of this science cannot be understated, and the benefits of STP are too plentiful and too effective to be ignored. Now more than ever, increasing operational efficiency, drastically reducing costs, and maximizing resources are all very attainable goals when planned for and undertaken methodically. There are plenty of consumer STP success stories, but the commercial process is often more complex, involving a greater degree of data capture and analysis. Additionally, commercial lenders have been less willing to commoditize pieces of the process as compared to their consumer counterparts. Now though, borne out by the successes in consumer and many small business lending groups, we see middle market commercial lenders starting to apply pieces of the STP model with a goal towards complete end-to-end coverage. Elimination of Redundant Data Input STP operates on the principal of inputting information once, reusing it and adding to it throughout the process. In most lending operations, information is requested, received, and re-entered during various phases (such as prospecting, keying into a sales pipeline, incentive and application tracking, underwriting, collateral valuation, etc). Efforts and data entry may be duplicated by bank personnel on many different occasions (as much as 8 to 12 times). By eliminating such redundancies organizations can maximize human resource investment and increase operational effectiveness and efficiency. Increasing Accuracy, Compressing Cycle Times Another benefit of non-replicated data input is to what degree it reduces opportunity for error, increasing data accuracy across the board. Rather than opportunities to mis-key data, each step in the process becomes an opportunity to enrich the data and clear any errors or resolve omissions. A unified data-file also enables simultaneous processing across the enterprise. Data held electronically, as opposed to in hard-copy, is accessible to any authorized user of the system at any time, regardless of geographical location. No longer is business resigned to moving at the speed of a manila file folder. Processing can move forward independent of individual departmental hold-ups or time frames in a multithreaded approach. Multiple tasks can be completed simultaneously, reducing overall cycle-times. Getting Rid of Paper Credit files and legal file collateral management create a great deal of paper that needs to be prepared, acquired, printed and stored. Eliminating the direct costs of most of that paper is of great value, in itself. Beyond pure cost reduction, however, lenders will realize other operational benefits. The benefits of STP workflow are multiplied with the implementation of imaging systems. Imaging systems allow for paper documents to be captured and stored as part of the digital file, reducing or even eliminating the need to retain hard-copy versions of most documents. Imaging and workflow have helped some achieve an altogether paperless credit operation. In commercial lending, it is typical for customers to submit hard-copies of tax returns, financial statements, and other documents. Imaging systems allow these to be captured and incorporated into the STP platform and then stored, accessed, viewed, and managed electronically. Cross-Sell Opportunities Customer information can give the lender a window into possible cross sell and up-sell opportunities. STP systems utilizing rules-based artificial intelligence (AI) decisioning can automatically suggest other credit products for which the borrower is qualified. For a given customer s profile, the loan officer is prompted to offer a portfolio of products: mortgages, refinance opportunities, credit cards, additional lines of credit, and cash management and deposit products. BenchMark Consulting International 2 Commercial Lending s Shot to Success October 2006
Should the customer express interest, information already gathered is pre-filled in the system without requiring the completion of new forms or the need to provide information already in the system. Cross- and up-selling becomes a quicker, less arduous and more attractive proposition. Early Warning Systems Another beneficial byproduct of making all customer data soft (and therefore sharable and reportable) is the degree to which analytics can be applied to data which can then be used for future modeling and decision-making. Tying on-going performance back to the initial decision attributes is very powerful It becomes increasingly easy to examine the profiles of customers whose loans perform well or poorly over time, and then adjust lending criteria and product qualification criteria accordingly. Collateral-related data can be similarly used to model and adjust rules-based decisioning. Making Service the Differentiator Today s main differentiator for lenders is the level of service they can provide. STP allows the bank to provide greater-than-expected service, quicker and easier than the competition, and with staff focusing more on consulting and guiding the customer than on data entry and application processing. The Proper Road to STP One of the biggest and most expensive mistakes made by businesses is to lead with technology as a perceived solution to a problem. The error is in believing that a piece of technology, alone, will fix or improve an organization. Instead, real success depends on developing an enterprise-wide, integrated approach to process management - one that addresses issues of policy, process, and the alignment of people before leaping into a major technology initiative and spend. BenchMark refers to this as the Optimization Pathway. Optimization Pathway Policy Drives Process Align People with Process Technology is the Enabler POLICY Credit Operational Corporate Benefit PROCESS Workflow Staff Balance SLAs PEOPLE Education / Training Coaching Experience Skill matching 70% 90% TECHNOLOGY Policy enabling Process enabling Feature utilization 100% & at times has a multiplier effect that can be both a positive and negative Policy and Process Before Technology Whatever the prime motivator, looking first to technology for solutions is a common mistake. Rather, an organization should arrive at technology decisions only after proper internal analysis. It is the bank s policy which drives the processes necessary for operations, lending and otherwise. It s very difficult for technology to tackle a gray process riddled with vagaries and variations. In order for any technology deployment to enact positive change, it should be built around logical, well mapped-out, and replicable processes. Therefore, it is important to define and solidify processes as much as possible. Often this entails re-engineering that eliminates extraneous or redundant pieces of the process. Organizations that approach change in the proper order policy, process, people and then technology complete technology design and implementation in a shorter timeframe and with significantly less expense than those who do not. Re-engineering the Process Process re-engineering should become part of the initial design and development of a lender s approach to STP. Automation of an approach that will simply replicate (perhaps faulty) current processes is not necessarily an operational advantage (for some it has been called speeding BenchMark Consulting International 3 Commercial Lending s Shot to Success October 2006
up a flawed process ). Rather, a wise adaptation strategy will use technology to automate and facilitate improved processes that come as a result of the re-engineering efforts. Key points to consider when re-engineering processes include at what point which pieces of information will be gathered and entered, and by whom. For example, at the very front-end only a limited amount of data is required to initiate the loan process. There will be further opportunity to gather additional information without repetition of data as the deal progresses. There is not yet a need to be exhaustive. Only core information should be gathered at the beginning, since, at this point, the customer may still travel any one of three paths: approval and the deal moves forward, rejection, or withdrawal. A welldesigned process will allow for the proper alignment of duties by each person in the credit chain enabling high-to-low value tasks to be assigned to the correct level of staff to properly align effort to risk. STP workflow reinforces this process. Compressing Processes Naturally, change done well will challenge some departments and fields of ownership within an organization. Change (policy, process, people, then technology) done well may eliminate some of those, entirely. Suppose a given task has historically taken 20 steps to accomplish. Careful analysis reveals it s not unusual for some of the same steps to be replicated, by different members of the organization. Proper process re-engineering powered by the proper technology can result in the same task completed in half as many steps. By examining the entirety of the process it s possible to see all the different steps, end-to-end, which are necessary to complete the process and which are redundant. Once that total picture materializes, decisions become clearer as to which can be combined, eliminated, or automated. Implementation Strategies Implementation strategies should be undertaken that will minimize and or mitigate the impact on day-to-day operations and not adversely impact the customer. Wherever possible, the transition to a new system should be as seamless to the customer as possible. A phased introduction of changes rather than a total system overhaul will minimize disruption. It will also allow for the fine-tuning of any necessary elements. Additionally, there should be coaching within the organization regarding interfacing with customers, both during and after the deployment period, in addition to training on the new systems. An Invaluable Competitive Edge Through proper internal analysis and preparation and the innovative use of currently available technologies, straight through processing has the potential to dramatically overhaul commercial lending operations, particularly in the small business and middle market arenas. Via STP, commercial lending can achieve improvements in efficiency, cost-savings, and customer satisfaction. In many cases, paper can be eliminated, altogether. Loan officers and customer relationship managers can focus on serving the customer, making service a lender s true differentiator. Adopting a policy and process, first approach before making any expensive and far-reaching technology expenditure not only ensures a greater chance of STP success, but can revolutionize the efficiency and effectiveness of the organization s processes themselves. Lenders who invest the necessary time and resources up-front will find themselves in a far better position than those who lead with technology first. BenchMark Consulting International 4 Commercial Lending s Shot to Success October 2006
John O Connor is the Commercial Lending Practice Manager responsible for the sale and delivery of commercial banking engagements. He holds extensive experience in commercial banking management, reengineering and streamlining operations, product and project management, mergers and consolidations. BenchMark Consulting International has specialized in improving the financial services industry since 1988. The company is a management consulting firm that improves the profitability of its financial services customers through the delivery of management decision-making information and change management services to realize the benefits of business process changes. BenchMark Consulting International s expertise is in the measuring, designing, and managing of operational processes. The firm has worked with 39 of the top 50 (in asset size) commercial banks, all 14 automobile captive finance corporations, several of the largest consumer finance corporations and many regional and community banks throughout the United States. Internationally, BenchMark Consulting International has worked with the five largest Canadian commercial banks, more than 40 European organizations in 11 different countries, in addition to financial institutions in Latin America, Australia and Asia. The company is a wholly owned subsidiary of Fidelity National Information Services, Inc., with clients in more than 50 countries and territories, providing application software, information processing management, outsourcing services and professional IT consulting to the financial services and mortgage industries. BenchMark Consulting International has dual headquarters in Atlanta, Georgia and Munich, Germany. For more information please visit www.benchmarkinternational.com BenchMark Consulting International 14 Piedmont Center NE, Suite 950 Atlanta, GA 30305 (404) 442-4100 www.benchmarkinternational.com