5 LOAN SERVICING CHALLENGES IN THE MODERN MARKET 2023

Consumer finance companies have witnessed a significant shift towards end-to-end lending solutions, particularly accelerated by the COVID-19 pandemic. While the adoption of digital technology in the lending sector was previously gradual, the pandemic prompted lenders to swiftly incorporate new technologies into their systems. As a result, many lenders discovered the benefits of integrating these technologies beyond ensuring operational continuity. Following the loan servicing challenges experienced during the pandemic, the lending industry is now embracing these advancements with enthusiasm.

While loan originations were initially the primary focus of automation, the digitization of the loan servicing phase has gained momentum in recent times. The market for loan servicing software is set to soar, projected to increase by approximately $2.13 billion by 2027, with a compound annual growth rate (CAGR) of 10.72 percent forecasted from 2022. Financial institutions are increasingly adopting cloud-based loan servicing platforms, enabling lenders to enhance operational efficiency, reduce costs, and maintain seamless communication and records with borrowers. Rapidly advancing technologies are being leveraged to tackle lenders’ loan servicing challenges, including compliance, consumer experience, communications, data insights, and scalability.

1. Loan Servicing Challenges: Compliance

In light of recent failures in the banking industry, lenders are taking extra precautions to ensure compliance with consumer financing regulations. Compliance has become more expensive since the Great Recession, primarily due to stricter lending regulations. Technology now plays a crucial role in the servicing process through ongoing monitoring and auditing. Smaller regional banks and non-bank servicing companies have also taken on a greater role in loan servicing.

While technology has increased compliance costs, studies indicate that non-compliance remains nearly three times more expensive for lenders. Servicing technology with built-in auditing capabilities helps lenders adhere to regulatory requirements and mitigate compliance-related risks. Cloud platforms enable lenders to stay up to date with changing regulations and proactively adjust their processes accordingly. Automated monitoring tools allow lenders to identify potential compliance gaps and address issues promptly, protecting both themselves and their customers.

2. Loan Servicing Challenges: Consumer Experience

Maintaining high levels of customer satisfaction throughout the loan lifecycle is crucial, including the loan servicing phase. This extended phase represents a critical period during which customers develop loyalty toward a lender. Providing borrowers with a positive experience involves promptly and efficiently meeting their wants and needs regarding their loans.

 Loan servicing technology enables lenders to deliver:

• Automated communications, including AI-enabled chatbots for frequently asked questions.
• Personalized interactions through multiple channels, customized offers, timely account updates, and recommendations.
• Self-service capabilities through digital portals and mobile apps, empowering borrowers to access accounts, make payments, and track balances. 

Augmenting the consumer experience improves customer satisfaction, leading to increased customer loyalty, referrals, portfolio growth, and better customer retention.

3. Loan Servicing Challenges: Communication

Effective communication is essential between lenders, borrowers, third-party vendors, and internal teams during loan servicing. Technology plays a crucial role in facilitating real-time, seamless communication throughout this process. While call centers with live representatives are necessary for handling complex issues, other real-time communication channels such as instant messaging and chatbots can fill gaps and enable timely interactions between lenders and borrowers. These channels allow borrowers to update information and make inquiries from anywhere. 

Technology also promotes collaboration between different departments and third-party vendors, streamlining processes and enhancing teamwork. Efficient internal communication improves relationships within the company and with outsourcing partners, fostering organizational cohesion.

4. Loan Servicing Challenges: Data Insights

Data is the driving force behind modern businesses, and loan servicing is no exception. Advanced analytics software enables lenders to extract valuable insights from the data collected during loan servicing, empowering them to continually enhance their operations. For example, performance data analysis can identify the causes of successful and unsuccessful outcomes, allowing lenders to refine loan approval criteria and identify loan opportunities with minimal risk. 

Data insights can be leveraged to:

• Customize marketing proposals.
• Develop products and services that best serve customers.
• Enhance strategic planning.
• Identify operational inefficiencies, bottlenecks, and information silos.
• Improve loan performance.
• Drive data-informed decision-making.
• Measure the impact of decisions on operations.
• Optimize processes.
• Personalize the customer experience.

By leveraging data insights, lenders can overcome various loan servicing challenges, enhance competitiveness, and make their operations more agile.

5. Loan Servicing Challenges: Scalability

Cloud-based technology, widely employed by third-party financial technology (fintech) companies, enables lenders to rapidly scale their operations up or down. This flexibility allows lenders to swiftly adapt to changing economic or regulatory environments. In any service industry, agility is crucial, and lending technology must provide the necessary flexibility.

Cloud-based solutions enable lenders to:

• Accommodate a diverse range of products and services.
• Adjust to changes in loan volumes.
• Allocate resources effectively.
• Adapt workflows to evolving requirements.
• Respond rapidly to market shifts.
• Support operational efficiency.

Resolving Loan Servicing Challenges With defi SERVICING

Lenders often underestimate the importance of the loan servicing phase compared to the initial steps of the loan process, such as originations. However, overcoming loan servicing challenges not only strengthens a lender’s brand but also enhances customer loyalty. At defi SOLUTIONS, we understand the end-to-end lending process, which enables us to provide technology solutions that meet borrowers’ wants and needs. Our products and services are designed to enhance compliance, customer experience, communications, data insights, and scalability. With defi SERVICING, lenders can effectively address loan servicing challenges, ultimately delivering better service to their customers.