Key Reasons to Improve Credit Scoring in Automated Loan Origination

Published: May 28, 2021

Key Reasons to Improve Credit Scoring in Automated Loan Origination

Published: May 28, 2021

More loans mean more clients, right? Yes! And that’s all well and good, but not so much so if they’re not profitable for your organization. When automating your loan origination process, it’s vital to include one key component — a credit scoring system. Better yet, an AI-powered one. Without it, you could find yourself overwhelmed by bad loans, fail to meet regulatory requirements, and other problems along the way. 

But what does an AI-powered credit scoring system do precisely, and how could it help you avoid bad loans and improve the process? Let’s find out.

What Is a Credit Scoring System?

They say knowledge is power, and that’s precisely what an AI-powered credit scoring system is. Utilizing data, a credit scoring system can tell you whether the loan you’re about to enter into is potentially good or bad for your business. So, then, how does it work?

A credit scoring system is build using scoring models compiled of datasets of previously issued loans. In the case of GiniMachine, we need approximately 1,000 samples. By using this historical data, the model can help establish whether a new loan will be good, as in will be repaid, or bad, as in the client is like to go overdue or default on payments. This is then validated using an index, and once proved, deployed as part of the loan origination process.

Fast Loan Facts from Recent Years

Fact 1.

In 2020, defaulted loans in the UK rose by 36% year on year, with refinancing in today’s market conditions even more challenging. (X)

Fact 2.

In the US, the defaulted loan volume equaled to $46.66 billion or the entire year. This is nearly three times as much as 2019’s amount but much less than 2009’s record amid the global economic crash. (X)

Fact 3.

Despite the lockdowns and sluggish year in general in 2020, the global lending industry is set to recover. With an expected CAGR growth of 5.5% from 2021 onwards, the market could grow to reach heights of $7,929 billion in the following two years. (X)

What Benefits Are There for Integrating a Credit Scoring Model into Your Loan Origination Software?

A long and drawn-out onboarding process can be a pain point for both you and your potential clients. However, failure to check risk before engaging in a contract could be much worse. Here are the reasons why you need to integrate a credit scoring model into your loan origination process to protect your clients and your business.

Avoid bad loans

Bad loans cost your business. It’s a fact. These poor lending decisions can impact your profitability immensely. That’s why it’s crucial to catch risky lending possibilities early. Integrating a credit scoring model into your loan origination software can help your business reduce non-performing loans by up to 40-50%.

Speed up processes

Loan origination can be a long, drawn-out process in which you gather adequate data to access your potential client. With automated loan origination software that includes a credit scoring model, you can speed up the process and ensure maximum business efficiency. Some of our clients report that their portfolios were boosted by over a third.

Raise customer satisfaction 

The world of finance is fast-moving, and your clients don’t want to spend any more time than necessary on a loan decision. With innovative credit scoring approaches, vendors take loan decisions faster and can provide more favorable terms for their customers. Predictive analytics makes all this possible even when the user data is incomplete or heterogeneous.

Meets regulatory requirements

Credit scoring methods are subject to regulations, which include data protection laws, fairness, capital requirements, and more. Responsible credit service providers can provide recommendations for the target markets, especially emerging markets, depending on the financial literacy and the potential number of consumers. Also, they can assist in the development of online lending software backed up with onboarding automation modules, including documentation, data validation, security, and others. 

Flexible and fits your needs

Whether you are a bank, building society, credit union, fintech, or another type of loan provider, credit scoring software is the tool for you. It is a flexible system that can efficiently work as part of a new software solution or a handy upgrade to your current technology stack, helping to assess the real credit history of your client in just a few simple clicks.

How to Integrate Credit Scoring into Your Loan Origination Software?

The first step is often the hardest, and from our years of experience, we know it’s often where our clients get stuck the most. Here are the steps we usually advise when onboarding a new piece of lending software or upgrading a current system. 

1. Assess your needs

Chances are that you have some ideas in mind when it comes to upgrading your onboarding or loan origination process. Now is the time to sit down and evaluate how they will fit in your overall business strategy. By doing so, you will see the strengths and weaknesses of your business and identify how credit scoring finds in the overall development picture.

2. Find a reliable provider

Unless you have an in-house team of experts, at this stage, you’ll need to engage the help of the specialists. A reliable service provider, such as HES Fintech loan management software, can guide you through the process and ensure that the end solution meets your needs to a tee. We’ll also advise you on any pitfalls you may encounter, as, with years of experience behind us, we’ve (almost) seen it all before.

3. Evaluate your options

Now, it’s over to you. At this stage, it’s time to make a decision on how you would like to see your solution working for your business. You can engage a number of business analysis tools, such as a SWAT analysis, cost-benefit analysis, or other, to decide if adding a credit scoring model at this time makes sense for you financially.

4. Make a decision

Once you’ve made a decision, and we hope you’ll agree that credit scoring is an essential part of any loan origination software, it’s time for step five.

5. Get started

And that’s getting started. As we’ve said before, it’s essential to work with an experienced provider if you don’t have your own in-house team. They will be able to tailor the software to your needs and do so quickly, avoiding any unnecessary delays in your time to market.

6.  Deploy your solution and reap the benefits

Now all that’s left is to deploy your solution. Over the coming months and years, you’ll see the changes and benefits to your current processes — efficiency, speed, and accuracy, to name a few — and hopefully, the deployed solution will meet the goals you set back in step one.

Wrap up

Based on encouraging analytics, as the consumer credit forecast for 2021 that predicts growth for the lending industry in the nearest future, which can balance out the economic fall of 2020 and the effects of the COVID-19 lockdown, it’s the best time to invest in innovative credit scoring for your business.

GiniMachine is an AI-based credit scoring platform that can be integrated with your lending software and complement or replace your legacy scoring modules. Contact us for a free live demo.