Redefining Loan Management and Servicing

Industry Insights

 ·  By Dan Desmond
A CSR agent takes care of a customer in a modern call center.

Once a notable laggard in digital transformation, the financial services industry is in the midst of a once-in-a-generation upheaval, with Fintechs unbundling the product suites and banking cores that once defined the most prominent players.

Debit products were the first to receive makeovers, as neobanks focused on providing better, mobile-first user experiences, without the traditional fees. Hand in hand with the transformation of debit card products came the modernization of issuer processing systems and the rise of features like dynamic spend controls and just-in-time funding.

But even as millions of people signed up for accounts with neobanks, credit products remained largely the same — a reflection of the underlying loan management and servicing systems that defined them.

No longer. The modernization of loan management and servicing has led to a flourishing of credit and debit products that vary by more than 20 attributes, including APRs, promotional periods, billing cycles, credit limits, due policies, fees, time zones, payment pouring and more.

Loan management and servicing software is changing to meet the ever-evolving needs of consumers and businesses, and to reflect their demands for customized, transparent, and safer credit and lending products.

Here are some insights into how loan management and servicing is being redefined to meet the expectations of a new generation of digitally-savvy consumers and business for superior products and real-time, responsive service.

From cuneiform to COBOL

Loan management systems are also one of the world’s oldest financial technologies dating back as far back as 3200 - 3300 BC to the earliest ledgers written on cuneiform tablets. They enable the loan lifecycle from start to finish by turning agreements between a borrower and a lender into a financial product with clearly defined parameters. 

Until the mid-20th century, loan management systems were basically teams of knowledge workers —  accountants and others who prepared ledgers and processed payments. The dawn of mainframe computers and the adoption of COBOL (Common Business-Oriented Language) by banks and financial institutions led to the first digital loan management and servicing systems. To this day, COBOL is used for transactions the world over from processing paychecks to cash register sales.

Although primitive by today’s standards, COBOL was revolutionary in its time. It was one of the first accessible and universal programming languages. Earlier coding languages were cryptic and obscure. They were also usually written for a particular operating system and use case. In contrast, entry-level programmers could be trained to use COBOL within months and master it within a year or two.

Banks and financial services continue to use COBOL because it’s functional and it works. It’s a well-understood language describing programs that have been refined, debugged, and perfected over decades, and are widely considered reliable and stable.

From COBOL to Google Sheets

And herein lies the reason digital transformation has become such an imperative for the financial sector. Banks can’t risk changing their COBOL-based loan management systems without compromising their integrity. Imagine a Jenga tower — you can only pull out and replace so many blocks before the whole thing comes crashing down. Thanks to the stability of COBOL, the financial services sector was slow to adopt new technologies, launch differentiated products, or add features to existing products.

But the sector is now staring change in the face. COBOL programmers are retiring and the language is no longer widely taught in many present-day computer science courses, where languages like Python and JavaScript have become more popular thanks to the prevalence of JavaScript web development frameworks and machine learning. 

With the 2008 recession came the need for new and more flexible financial products. Increasingly distrustful of banks and other financial institutions, ordinary people  looked for alternative ways to bank and manage their money. Fintech SaaS startups responded, and a new tech boom was born.

Fintech SaaS startups are known for their can-do problem-solving approach, as well as their optimistic embrace of new technologies. In the case of loan management and servicing, however, this approach backfired. Many Fintechs attempted to bring products to market using Google Sheets instead of traditional loan management and servicing systems that cost dramatically more. In doing so, they underestimated the underlying complexity of a modern loan management and servicing platform.

It is possible to track a single, simple lending product using Google Sheets — especially when borrowers are reliably making on-time payments. But the lives of even simple loans can take unexpected twists and turns — often mirroring the lives of their borrowers. When that happens, a loan management and servicing system embodied in Google Sheets becomes a liability.

Enter modern, immutable loan management and servicing platforms

In contrast to Google Sheets and legacy systems, modern loan management systems are flexible enough to adapt to unexpected detours in the life cycles of multiple products — including those funded by an array of lenders and delivered in a variety of formats from Buy Now Pay Later (BNPL) to revolving lines of credit.

These platforms also have an important feature that Google Sheets lacks. They are — to varying degrees  — immutable. This means that account entries, once made, cannot be changed. The events that occur in the life of a loan are indelible. With true immutability, the branching realities that occur during the life of a product are preserved. New events, like the processing of a dispute, don’t overwrite older ones.

Designing an immutable ledger requires deep industry knowledge. The unchangeable ledger must support ever-changing products in a scalable, sustainable way. To date, there are only a handful of companies that claim to be able to do this. (Canopy Servicing is one of them.)

Immutable ledgers unlock a new category of highly personalized or customized financial products. Rather than go to market with one or two credit or lending products, innovative Fintechs are offering more personalized options. Enabled by modern loan management and servicing platforms, they are launching innovative financial products previously thought out of reach when working with legacy lending management systems.

The Fintech customer revolution 

Driving the evolution of loan management and servicing is a new generation of customers that expect their financial products to be personalized, transparent, and of course, digital.

Millennials (27 to 41) and Gen Zers (11 to 26)  are now the largest generational group in the U.S. Raised in a digital, media-saturated world they have lived their adult lives on the forefront of technological change. They embraced texting when older generations were primarily using voice and email to communicate. They were already moving on to Instagram and emojis, when their parents were still learning to use Facebook.

When neo-banks came on the scene around 2016, millennials were more ready to give them a chance than other age groups. According to Gallup, millennials reported switching their primary bank at a rate that was 2.5 times more often than baby boomers. As Gen Z grew up, they opened their own accounts at neobanks. As of last summer, approximately one in four Gen Zers and millennials reported digital banks as the source of their primary checking account.

The hunt for better digital alternatives by millennials and Gen Z extends to lending and credit products. In 2018, they made up more than 80% of the users of new Buy Now Pay Later lending products. BNPL is particularly popular with Gen Z, which made up nearly 37% of all BNPL users last year, compared with millennials, who made up 30%.

It is not just a preference for all things digital that drives the behavior of millennials and Gen Z. According to Zendesk’s 2021 Customer Experience Trends Report, connecting with these generations is all about personalization. This applies equally to messaging channels, consumer goods, and financial products. According to Ron Shevlin, director of research at Cornerstone Advisors, neobanks’ winning strategy was to create personalized banking services for specific segments such as environmentally conscious consumers, African Americans, or people who identified as LGBTQ+.

New lending products for a new generation

Opportunities abound to use personalization to create better lending and credit products. For example,  modern loan management and servicing platforms can support convertible credit — borrowers can convert a purchase made with a typical revolving line of credit into a BNPL loan that provides a greater sense of control. By the same token, a BNPL provider can create a product that converts missed BNPL payments into revolving lines of credit instead of reporting the loan to the credit bureaus. This could, in practice, protect the credit rating of the borrower and preserve the value of the lender’s portfolio.

Modern loan management systems also can also enable real-time communication between lenders and borrowers to help maintain a borrower’s overall financial health. Lenders with permission to do balance checks can warn a borrower about the lack of available funds to make an upcoming payment. They can communicate about possible fees and penalties before they are assessed.

Lending and credit products have been the same for decades, their familiarity largely taken for granted. In the absence of consumer demand for new types of products, there was little reason for the underlying infrastructure to evolve. 

Then a generation of borrowers began questioning the lack of transparency and cookie-cutter nature of the lending and credit industries. Companies like Canopy Servicing began building modern loan managing and servicing platforms. Today, the redefinition of loan management and servicing is leading to the wholesale re-design of credit and lending products. Increasingly, loans and credit products are as diverse as the borrowers requesting them, reflecting their need for affordable credit on terms they can easily understand.

Read next: Why Immutability is Critical for Fintechs

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