Automation in banking has come a long, long way since it was first envisioned by S. Clark Beise, a senior vice president at the Bank of America in the early 1950s. It’s a crying shame that one major function within most banks is still stuck in the ’50s — specifically, the procedures and processes involved in the creation and maintenance of borrower, note and collateral files, or “credit administration” files.
In most organizations, this process is essentially unchanged from the way it was done 50 years ago. Building and maintaining these files is by and large an antiquated process that could – and should – be made much more effective. It truly is the Final Frontier for banking automation.
The following are just a few examples of the advances being made in the deposit side of banking, now in its third or fourth generation of improvements:
- Primitive check reader-sorters that processed a few hundred items per minute have evolved into the era of Check 21, teller capture and merchant capture, where a paper check is handled once and then is never again touched by human hands.
- Sophisticated fraud-detection systems constantly scan transactions for patterns of illegitimate activity (and are better at spotting potential fraud than the steely-eyed bookkeepers posting checks by hand in the 1950s).
- Book-entry recordkeeping has eliminated the manual clipping of coupons once common in investment areas.
- Interest on both loans and deposits is calculated using a wide variety of sophisticated methods (and an intimidating array of floating-rate indices and parameters).
- General ledgers are posted by branch, region, profit center and product type, instead of in large, manual Boston Ledger binders.
- Even the menial task of counting currency is done with advanced currency counters that can spot a counterfeit while processing 25 bills per second.
But with respect to loan, credit and collateral files, lenders still gather paper copies of documents, support staff use a two-hole punch straight out of the 1890s to manually affix them within cardboard file folders, and other staff members file them by hand. These files are retrieved manually when they are needed and then re-filed by hand until the next manual retrieval. When a file is lost, it’s lost — there is usually no backup except for microfilm copies of selected “crucial” elements. The extent of the automation is (maybe) a powered filing system that conserves floor space but does nothing to make use of the information more efficient or even the filing process itself economical. This is how many banks maintain the tangible evidence securing most of their assets!
Imagine for a moment how it might be:
- When a prospective client arrives at a lender’s office, or when a current customer has additional needs, why not begin to scan the information into a computer right there on the spot?
- Right after the initial interview, why not have a lender fill out a “requirements” checklist — by clicking on a box on a screen — to describe what information will be necessary for this loan to be approved under the bank’s credit policy?
- Support staff, perhaps in another building, could assist the lender in gathering the rest of the needed documentation, or ensure that all needed documentation requirements have been checked off.
- Appraisals, tax returns, and other supporting material could be delivered electronically via PDF and added to the file within seconds after receipt.
- If an appraisal review was needed, the appraisal could be electronically sent to an off-site reviewer and a record of any comments added to the file immediately after the review has been completed.
- Credit analysts could perform their functions without delay, and from a centralized location where appropriate. Other needed records could be added to the files immediately upon receipt from the borrower.
- If the current need is for an advance on an existing construction loan, color copies of progress reviews could be appended to the file as often as needed — and, again, reviewed centrally by the appropriate personnel — within minutes of the review’s completion so that draws could be processed without delay.
- In the case of loans with “non-fixed” collateral (inventory, floor plan loans, equipment, etc.) it would be possible to review, update and validate its condition using the camera now built into most cell phones.
- Other loan, borrower and collateral records also would become instantly accessible enterprise-wide immediately upon receipt, no matter how widely dispersed the organization or where credit administration personnel are physically located.
- Finally, loan approval and ongoing review processes could be greatly streamlined. Better automation (or, for many banks, any automation) would reduce the turnaround time with respect to lending decisions—always a key competitive differentiator.
Banks with primitive credit administration files should consider the following as required functionality for a state-of-the-art loan document imaging system:
1) Effective integration with the core processing system, to enable such things as:
- automatic population of customer or loan index information, leading to the ability to “hard wire” the document imaging system and the core system together, which in turn leads to the ability to:
- track missing or expired documents to ensure compliance and reduce risk (e.g. to ensure that all required documents are both present and current)
- retrieve documents pertaining to any relationship based on any one of a number of possible different indexes, such as loan number, CIF number, SSN or EID, document types, or collateral description
2) An efficient capture process, which includes the ability to:
- produce bar-coded cover sheets with pre-indexed values (such as loan number, CIF number, document type, etc.) so that manual indexing is not necessary
- recognize common OCR and barcode formats to enable use of documents with pre-printed barcodes where appropriate
- use common high-speed / high-volume scanning equipment
- scan either remotely, at each location, or in a centralized area, based on where the document was received
- import documents of any common type (PDF files, Word documents, TIF or GIF files, faxes, etc.)
- the ability to import documents directly from doc prep, financial statement analysis, and other ancillary systems
- the ability to perform automated indexing via text parsing
3) Effective IT design, such as:
- use of non-proprietary indexing and storage architecture
- easy-to-use Windows-style tabs, folders, etc. so that image files can be organized in a manner analogous to the current paper files
- the ability to modify tabs and folders, or otherwise update the system post-implementation to meet processing needs not identified during the initial implementation
- use of browser-based or thin client-compatible desktop technology
- a full document history for every document (so that prior versions of superseded documents can be made available later, if necessary)
- open and flexible security and access controls for all documents and functions, including the ability to restrict viewing or printing selected document types by user
- the ability to securely append a signature to a document, so that the two are inseparable post-signing
4) Availability of electronic workflow capabilities (or system design/functionality that makes workflow capabilities unnecessary)
Installing a loan document imaging system should include a comprehensive workflow review. It makes no sense to overlay new technology on top of archaic, redundant or error-prone processes. Implementation of such far-reaching new technology is best accomplished by a cross-functional team that includes participation from all lending areas (commercial, consumer, mortgage, etc.) and representation from lending officers, loan assistants, loan closing/funding personnel, loan administration/servicing staff, audit and loan review staff, centralized document imaging staff (where such a separate function exists), retail/branch delivery staff, and IT personnel.
There is every reason why banks should have as their over-arching objective an environment where all non-customer facing loan activities (including committee meetings, loan review activities, and safety and soundness and compliance examinations) are performed 100 percent off-site using images and not paper. It’s time for this aspect of credit administration to leave the Sputnik days behind!